WEBVTT NOTE Only the Austrians Can Explain Depressions 1 00:00:00.000 --> 00:00:30.000 I'm glad that it seemed like a full room here. I was concerned yesterday. There was a lot of snow, you know, in the northeast, I believe, and I was worried that, you know, gee, I'm giving them a talk. Of course, I'm very narcissistic, and so my thought was not all the millions of inconvenienced people, but rather, are people going to miss my early morning talk? So I'm glad to see most of you got here. I was flying from Nashville, and there was a delay for my first flight. It was a two-hour delay, and I was actually pretty calm about it. I was saying, okay, you know, it's the weather. What can they do? 2 00:00:30.000 --> 00:00:35.000 So I wasn't going to be angry at the airline. So we're sitting in the lounge area waiting 3 00:00:35.000 --> 00:00:39.640 and then the announcement comes through and they said something like, you know, folks, 4 00:00:39.640 --> 00:00:43.440 they kept pushing back the departure date or time by 15-minute intervals. You know how 5 00:00:43.440 --> 00:00:46.720 they do that? Like they say, we're going to start boarding in 15 minutes and then 15 minutes 6 00:00:46.720 --> 00:00:51.560 pass and they say we're going to start boarding in another. So they keep pushing back the 7 00:00:51.560 --> 00:00:57.000 time of recovery, if you will, sort of taking a cue from the government. And we're all 8 00:00:57.000 --> 00:01:27.000 and then one point though they said something like it's the maintenance crew tells us that it should be any minute now and that struck me as odd that you know if it's maintenance what does that have to do with the weather you know is this like some sort of climate engineering and then so I asked one of the other passengers who had been there longer because I had gotten there late and I said what's wrong what what's the delay and he said oh because the plane has a flat tire all right and I thought that was I thought he was kidding at first he was serious and so we're all wondering you know what why would it take two hours to fix a flat tire like what you know is this 9 00:01:27.000 --> 00:01:57.000 Union Work. What's going on here? And it turns out, does anyone know the answer why it would take two hours for them to fix the tire? Because they had to fly the tire in from another city. Come on, don't you guys work in the airlines? So, so of course, you know, I'm gassed and the guy next to me starts, you know, saying, yeah, you would think my Honda Civic has a, you know, a spare tire in the back. You'd think a plane could have that, right? And people are laughing. But of course, I'm an economist and I'm thinking, well, no, that would be stupid because then at any given time you'd have thousands of 10 00:01:57.000 --> 00:02:05.000 Spare tires being flown around the country using up all that jet fuel. It would be much more efficient to just have the airlines, you know, have the spare tires, right? 11 00:02:05.000 --> 00:02:12.000 So the way I condensed that for the guy is I just said, well, it's not like they could pull over up there and change the tire, right? 12 00:02:12.000 --> 00:02:17.000 And he didn't appreciate that because I was sort of, you know, making fun of him. 13 00:02:17.000 --> 00:02:22.000 So we get on the plane, and of course, who's sitting next to me but that guy, right? 14 00:02:22.000 --> 00:02:26.560 And incidentally, if he somehow was seeing this on the internet, you were a wonderful 15 00:02:26.560 --> 00:02:31.960 companion. I'm not, I'm just doing this for the joke material. And so we're talking, and 16 00:02:31.960 --> 00:02:35.280 I actually was interested in the guy because he said he was a defense lawyer. I was like, 17 00:02:35.280 --> 00:02:39.560 oh, that's interesting, you know, and he was, he had been complaining about the federal 18 00:02:39.560 --> 00:02:43.320 government in terms of the FAA and, you know, complaining about the airlines and so on. 19 00:02:43.320 --> 00:02:46.880 So I was like, this is my kind of guy, all right, you know. And so I start talking and 20 00:02:46.880 --> 00:02:52.080 And then he starts, I didn't prompt this at all, he starts railing against how the bankers 21 00:02:52.080 --> 00:02:57.440 own the politicians and these big banks are taken over and they buy and sell legislators 22 00:02:57.440 --> 00:02:58.440 and stuff. 23 00:02:58.440 --> 00:03:01.840 And at first he was a little bit timid and he said, now when I say they buy and sell, 24 00:03:01.840 --> 00:03:06.800 I just mean they influence, I'm like, don't worry, you're not offending me, it's, you 25 00:03:06.800 --> 00:03:08.240 know, please continue. 26 00:03:08.240 --> 00:03:12.920 And so, you know, because I'm sitting here reading the creature from Jack of Ireland 27 00:03:12.920 --> 00:03:16.440 in the skies, you know, where he's going to offend me with my sensibilities. 28 00:03:16.440 --> 00:03:23.960 So he's going on and on about this, and then he says, and of all the, the two parties are 29 00:03:23.960 --> 00:03:28.100 all the same, he said, there's just one politician out there who's willing to stand up and tell 30 00:03:28.100 --> 00:03:32.640 these big bankers what's up, and so of course, I'm getting ready to say, you'll never guess 31 00:03:32.640 --> 00:03:36.520 what I'm doing tomorrow, thinking he's talking about Ron Paul, and he goes, and that politician 32 00:03:36.520 --> 00:03:46.060 is Bernie Sanders, and I was like, ah, all right, so, so anyway, I couldn't impress him 33 00:03:46.060 --> 00:03:51.300 with my Ron Paul card but I figured okay the two-hour delay is worth it because now I have 34 00:03:51.300 --> 00:03:55.940 a joke I can tell tomorrow so that was that was my plane trip all right so what I'm talking 35 00:03:55.940 --> 00:04:01.460 about with you guys is why the Austrians are the only ones who can explain the depression 36 00:04:01.460 --> 00:04:04.940 so what I'll do is I'll first give you in a condensed version obviously in this kind 37 00:04:04.940 --> 00:04:09.300 of talk I can't get too technical but I'll give you the basic story of what the Austrians 38 00:04:09.300 --> 00:04:15.140 think about the Great Depression and of course the recent you know housing boom and bust 39 00:04:15.140 --> 00:04:20.180 in the crisis that we're in right now, what the Austrians think the cause of that is. 40 00:04:20.180 --> 00:04:25.240 And then I'll contrast it with two of the other leading explanations, namely the Keynesian 41 00:04:25.240 --> 00:04:31.460 explanation and then the monetarists. So just to give you an outline right now, the Austrians 42 00:04:31.460 --> 00:04:34.700 obviously think the Central Bank, the Federal Reserve and the United States has something 43 00:04:34.700 --> 00:04:39.740 to do with both the Great Depression and then what we recently just went through, whereas 44 00:04:39.740 --> 00:04:44.740 The Keynesians attribute it largely to a collapse in aggregate demand. 45 00:04:44.740 --> 00:04:47.740 To put it bluntly, they don't think people are spending enough. 46 00:04:47.740 --> 00:04:52.840 The Keynesians think if consumers, because they get skittish or for some reason pull 47 00:04:52.840 --> 00:04:57.660 back and stop spending, well then aggregate demand collapses and it's a downward spiral 48 00:04:57.660 --> 00:05:00.900 and you need the government to step in and fill the breach and you need the government 49 00:05:00.900 --> 00:05:06.560 to run huge deficits to boost up aggregate demand so that income can still be earned 50 00:05:06.560 --> 00:05:10.280 and then that's, you know, the economy recovers and then finally the government can sort of pull back 51 00:05:10.280 --> 00:05:14.200 once the consumer is willing to spend more. So that's the Keynesian diagnosis 52 00:05:14.200 --> 00:05:17.560 and they're going to say that's what happened back in the thirties is 53 00:05:17.560 --> 00:05:21.120 you know, the government wasn't willing to run big enough budget deficits and that's why 54 00:05:21.120 --> 00:05:24.280 the depression lasted so long and then in our own time 55 00:05:24.280 --> 00:05:28.420 the Keynesians will say if only President Obama when he had just come into office 56 00:05:28.420 --> 00:05:32.800 had pushed through a much bigger stimulus package then we wouldn't be 57 00:05:32.800 --> 00:05:37.560 stuck in this malaise that we're in right now. So that's the Keynesian view, and then 58 00:05:37.560 --> 00:05:44.280 the monetarists, the people that typically follow in the wake of Milton Friedman's explanation 59 00:05:44.280 --> 00:05:49.360 of the Great Depression, Austrians in many areas are very similar to them. They're both 60 00:05:49.360 --> 00:05:53.720 generally free market, the Austrians and the supply-siders and the monetarists, the Chicago 61 00:05:53.720 --> 00:06:00.280 School economists, but when it comes to the Great Depression, there too, Milton Friedman's, 62 00:06:00.280 --> 00:06:10.280 with his co-author Anna Schwartz. His big contribution on this topic was he said that what caused the crash in 29 was the Fed tightened the money supply, right? 63 00:06:10.280 --> 00:06:15.280 That the Fed jacked up interest rates and pulled back and that caused the stock market crash in 29. 64 00:06:15.280 --> 00:06:27.280 And then in the early 30s, Friedman says the Fed should have just pumped in a ton of new money, you know, flood the market with liquidity and slash interest rates and that would have given a shot in the arm of the economy 65 00:06:27.280 --> 00:06:31.680 and nipped the incipient depression in the bud, but because the Fed was too timid is 66 00:06:31.680 --> 00:06:35.020 partly because they were on still on the gold standard and their hands were tied, right? 67 00:06:35.020 --> 00:06:39.800 So that's the Friedman explanation of the Great Depression, that the Fed was too timid 68 00:06:39.800 --> 00:06:46.240 and inflating after the stock market crash. And then in terms of more recent times, again, 69 00:06:46.240 --> 00:06:51.840 a lot of people in this tradition of Milton Friedman say, if only Ben Bernanke hadn't 70 00:06:51.840 --> 00:06:55.600 been so timid, you know, they can't understand if you read the blogs and so forth of these 71 00:06:55.600 --> 00:07:03.120 These guys, PhDs in economics, these aren't hacks, or not that the two are mutually exclusive, 72 00:07:03.120 --> 00:07:08.840 but saying with a straight face that, yeah, Ben Bernanke, we can't understand. 73 00:07:08.840 --> 00:07:10.600 It's really amazing when you read these things. 74 00:07:10.600 --> 00:07:13.260 These people, they're just like, what is wrong with Ben Bernanke? 75 00:07:13.260 --> 00:07:17.280 They're going back and looking at his academic papers and seeing the stuff he said back when 76 00:07:17.280 --> 00:07:23.520 he was an actual academic economist, and his specialty was the Great Depression, and they're 77 00:07:23.520 --> 00:07:27.240 They're looking at his policy decisions now and they say, well, I can't understand, you 78 00:07:27.240 --> 00:07:31.160 know, so I'll leave it to other speakers to speculate on the motives and so forth, but 79 00:07:31.160 --> 00:07:35.640 it just, you know, they can't understand why someone who was able to hand out billions 80 00:07:35.640 --> 00:07:40.440 of dollars to the world's most powerful bankers might be deviating from his, you know, dissertation 81 00:07:40.440 --> 00:07:41.520 committee topic. 82 00:07:41.520 --> 00:07:46.620 So in any event, that's their mentality and they think that right now it's only because 83 00:07:46.620 --> 00:07:50.640 Bernanke is too stingy and if only he would flood the market with more money would we 84 00:07:50.640 --> 00:07:51.640 get out of this. 85 00:07:51.640 --> 00:07:55.540 Alright, so that's those two schools, and I'll come back to that after I explain the Austrian view. 86 00:07:55.540 --> 00:08:00.940 So the Austrians, what do they think? And again, I know some of you are new here. 87 00:08:00.940 --> 00:08:05.540 I was talking with some of the students yesterday, and so don't worry if you don't get it all in this talk. 88 00:08:05.540 --> 00:08:08.240 Other speakers are going to come back to these themes. 89 00:08:08.240 --> 00:08:14.340 But the Austrians, what they think is, first of all, the interest rate is a price. 90 00:08:14.340 --> 00:08:18.040 Okay, it's a special kind of price. If you want to say it's the price of borrowing money, 91 00:08:18.040 --> 00:08:24.840 or Austrians might more typically say it relates the value of consumption now versus later, right? 92 00:08:24.840 --> 00:08:29.540 That's one way to think about it, that the interest rate sort of tells you what's the premium on present consumption, 93 00:08:29.540 --> 00:08:36.040 that the higher the interest rate, the greater the advantage of deferring consumption, you know, the more, 94 00:08:36.040 --> 00:08:41.040 if you put $100 aside today and the interest rate's 10%, you get $110 next year, okay? 95 00:08:41.040 --> 00:08:45.540 Whereas the interest rate's lower, you don't get that much of an advantage from waiting, okay? 96 00:08:45.540 --> 00:08:54.540 So that's the idea. The interest rate, in a sense, is the market's price showing you the degree of impatience, if you will, in the community. 97 00:08:54.540 --> 00:09:02.540 And so the idea is, assume there was no central bank and the market was just a pure free market, 98 00:09:02.540 --> 00:09:10.540 the interest rate helps coordinate consumption and production decisions today with the long-term plan of entrepreneurs. 99 00:09:10.540 --> 00:09:40.540 So the idea is just to give you an example, let's say the interest rates originally, whatever, 5% and everyone's making their plans and that's how things are, you're in a nice equilibrium and then the community people, they decide, you know what, let's just save more so that we can send our kids to college or so that we can take a trip five years from now, right? So a bunch of families in the community decide, you know, we're going to stop spending out, going out to eat so much and spending money on restaurants and we're going to, you know, maybe not buy that new plasma screen TV or what have you, so they're going to 100 00:09:40.540 --> 00:09:45.420 to cut their consumption spending this year and next year and the third year, and with 101 00:09:45.420 --> 00:09:48.860 that extra money, they're going to save and invest more, all right? And because they're 102 00:09:48.860 --> 00:09:52.440 thinking 10 years down the road, whatever it is, you know, Sally's going to be going 103 00:09:52.440 --> 00:09:56.140 to college and we have to have more money at that point to pay for it, or we're going 104 00:09:56.140 --> 00:10:01.140 to take that trip to Europe 10 years down the road, okay? That's the idea. So we all 105 00:10:01.140 --> 00:10:04.820 understand that from the individual household's point of view, how that makes sense. If interest 106 00:10:04.820 --> 00:10:09.400 rates are positive, especially the bigger the interest rate, the more advantage there 107 00:10:09.400 --> 00:10:14.400 The answer is to not going out to eat today, putting that money aside, letting it roll over for 10 years. 108 00:10:14.400 --> 00:10:16.400 That's straightforward. 109 00:10:16.400 --> 00:10:23.400 But the Austrians, they say, okay, step back from the individual household and just look at the economy as a whole. 110 00:10:23.400 --> 00:10:31.400 How can it be that if everybody is saving more, that everyone can then have that much more consumption 10 years from now? 111 00:10:31.400 --> 00:10:37.400 How does that actually work, to go from the individual decision to sort of physically what's happening in the economy? 112 00:10:37.400 --> 00:10:45.400 And the answer is that when people all save more, that tends to push down the interest rate, right, because the supply of savings goes up. 113 00:10:45.400 --> 00:10:53.400 So everyone starts saving a lot more, putting more money in the bank or going out and investing in businesses, you know, buying corporate bonds or whatever it is. 114 00:10:53.400 --> 00:11:00.400 That tends to push down interest rates. And so that makes it easier for businesses to borrow as it becomes cheaper to borrow. 115 00:11:00.400 --> 00:11:06.400 And so the idea is what's happening is people are saving more. They're not eating out at restaurants as much. 116 00:11:06.400 --> 00:11:11.520 So the restaurants, their business is down, they lay off some workers, but then other 117 00:11:11.520 --> 00:11:16.540 industries that are more future-oriented, they have longer-term horizons, because the 118 00:11:16.540 --> 00:11:21.880 interest rate falls, they're able to expand, right? So it's not that you just see unemployment 119 00:11:21.880 --> 00:11:26.920 go up and that's it, it's rather certain sectors shrink and that frees up workers and other 120 00:11:26.920 --> 00:11:31.780 resources to go into the expanding sectors, okay? So there's a, you know, a coordination 121 00:11:31.780 --> 00:11:36.120 problem that if the businesses who are going to be selling more stuff 10 years from now, 122 00:11:36.120 --> 00:12:06.120 The companies that are in charge of giving cruises to Europe, they obviously have to, for this all to work smoothly, they have to know that 10 years from now all these people are planning on taking more trips, but you get the idea that physically it's possible that people consuming less now freeze up resources that don't just sit there, they get redirected into some other projects, so the economy can sort of shift from producing plasma screens and sports cars and fancy dinners now, and it just starts producing different things. 123 00:12:06.120 --> 00:12:14.120 and other things, like maybe it produces drill presses or components for an assembly line or other things that are used in long-term production. 124 00:12:14.120 --> 00:12:22.120 Okay, so that's the idea that it's not that the economy, if people stop consuming, just withers away, it just reconfigures itself. 125 00:12:22.120 --> 00:12:30.120 And yeah, there's a transition period, especially if consumers make this decision and it's unexpected, but that's the idea in the Austrian view. 126 00:12:30.120 --> 00:12:35.360 is one of the key ways that the market economy sort of regulates itself that all 127 00:12:35.360 --> 00:12:38.840 that information gets communicated around that when people are saving more 128 00:12:38.840 --> 00:12:42.760 it pushes down the interest rate and the low interest rate is sort of a green 129 00:12:42.760 --> 00:12:47.000 light to the entrepreneurs saying okay it's okay to invest in longer-term 130 00:12:47.000 --> 00:12:52.080 projects okay so that's that's the basic idea and that's what would happen if 131 00:12:52.080 --> 00:12:54.640 there were a free market so now the issue is what happens if there's a 132 00:12:54.640 --> 00:12:59.520 central bank like the Federal Reserve and they just come in and decide to 133 00:12:59.520 --> 00:13:02.520 to stimulate the economy by pushing down the interest rate. 134 00:13:02.520 --> 00:13:09.520 And when Ben Bernanke pushes down the interest rate, it's not that he had a bunch of his own saved up funds 135 00:13:09.520 --> 00:13:12.520 and he decides to lend them out, right? No. 136 00:13:12.520 --> 00:13:19.520 When Bernanke pushes down the interest rate, he writes checks drawn on thin air and buys assets 137 00:13:19.520 --> 00:13:21.520 and that floods new money into the economy. 138 00:13:21.520 --> 00:13:26.520 So for our purposes, you can think of it just as he's literally running a printing press, 139 00:13:26.520 --> 00:13:41.560 The question then is, the Austrians say, well, what effect does that have if the interest 140 00:13:41.560 --> 00:13:46.120 rate gets pushed down, not because people are going out to eat less and not because they're 141 00:13:46.120 --> 00:13:50.240 saving up more out of their paychecks, but because the central bank is just creating 142 00:13:50.240 --> 00:13:55.800 new money out of thin air and dumping it in the credit market? What effect does that have 143 00:13:55.800 --> 00:14:00.420 and the Austrians say, well, it leads to an unsustainable boom, that the interest rate 144 00:14:00.420 --> 00:14:06.520 goes down and businesses still respond as if it were a legitimate drop in the interest 145 00:14:06.520 --> 00:14:11.920 rate caused by extra saving, and so businesses start hiring workers and they start expanding 146 00:14:11.920 --> 00:14:17.140 their operations, making long-term investments, because that's what the interest rate helps 147 00:14:17.140 --> 00:14:22.300 to coordinate, but of course that's a false signal. There isn't more saving available. 148 00:14:22.300 --> 00:14:26.300 Actually, it's the opposite, that when the interest rate goes down, people save less. 149 00:14:26.300 --> 00:14:31.300 And so, the Austrians say, when the Fed tries to stimulate the economy by pushing down interest rates, 150 00:14:31.300 --> 00:14:36.300 it creates this artificial or unsustainable boom. 151 00:14:36.300 --> 00:14:42.300 And that you can get by with it for a few years, because first of all, the prices are all screwed up, 152 00:14:42.300 --> 00:14:49.300 and on paper, it looks like businesses are very profitable, but in fact, the economy is consuming its capital, right? 153 00:14:49.300 --> 00:15:05.300 There actually isn't more stuff to go around and it is physically impossible. You can't have people consuming more, buying more plasma screens and going out to eat more, and having businesses building more factories and so on. There's just not enough physical resources to go around. 154 00:15:05.300 --> 00:15:14.300 So again, when it was legitimate and a sustainable expansion, what would have happened is some sectors would shrink, free up those resources, and the other sectors would expand. 155 00:15:14.300 --> 00:15:20.300 So there was no free lunch going on there. It was one thing, you know, scaled back while the other thing scaled up. 156 00:15:20.300 --> 00:15:26.300 Whereas during the unsustainable boom, there's a period in which it seems that everything's growing at once. 157 00:15:26.300 --> 00:15:32.300 And so it's a subtle point, but the Austrians say, of course, that's not possible. What's happening is people are being fooled. 158 00:15:32.300 --> 00:16:02.300 So to give you a real world example, during the housing boom years, you had businesses were expanding, of course, especially in the housing sector, you know, people were building new houses as if there was all this extra, you know, resources available, but at the same time, the consumers were going out and buying plasma screen TVs and buying all sorts of electronics goodies from other countries. And what you had was the country as a whole was living beyond its means, right, that it was consuming more than its income. 159 00:16:02.300 --> 00:16:32.300 and you could do that for a few years and we did but the idea is eventually something had to give that's not physically sustainable and so eventually the crisis sets in so the Austrians say the crisis can come sooner if the central bank comes to its senses often it's because the price inflation measures start rising and the central bank gets nervous and starts raising interest rates and not pumping in as much new money and then once the interest rate rises you know that makes prices 160 00:16:32.300 --> 00:16:37.300 The closer to what they should have been, people see, oh my gosh, we shouldn't have been investing so much. 161 00:16:37.300 --> 00:16:44.300 They start laying off workers and scaling back, okay? And the economy moves back towards where it ought to be. 162 00:16:44.300 --> 00:16:48.300 So in the Austrian view, it's almost the exact opposite of the conventional analysis. 163 00:16:48.300 --> 00:16:53.300 The Austrians look at the unsustainable boom and say, that's when mistakes are being made. 164 00:16:53.300 --> 00:16:57.300 That's the bad period when resources are getting misallocated. 165 00:16:57.300 --> 00:17:01.500 The housing boom, for example, the Austrians would see all these new homes being built 166 00:17:01.500 --> 00:17:06.300 knowing there's not going to be enough real demand for that, that there aren't enough 167 00:17:06.300 --> 00:17:11.060 new people being born or coming into the country to live in these houses. We're overbuilding. 168 00:17:11.060 --> 00:17:17.140 And so every time they lay a new foundation, they start devoting wood and marble and glass 169 00:17:17.140 --> 00:17:22.100 into a house, the Austrians say, okay, that's more and more resources that are now being 170 00:17:22.100 --> 00:17:26.820 irrevocably locked into that particular structure when they should have gone somewhere else 171 00:17:26.820 --> 00:17:28.460 for a certain proportion of them. 172 00:17:28.460 --> 00:17:30.420 There shouldn't have been so many houses built, 173 00:17:30.420 --> 00:17:33.620 and that was a genuine mistake, a misuse of resources. 174 00:17:33.620 --> 00:17:35.240 So it was during the housing boom, 175 00:17:35.240 --> 00:17:37.700 the Austrians would say that things were bad, 176 00:17:37.700 --> 00:17:40.260 in the same way in the late 1920s, 177 00:17:41.180 --> 00:17:43.260 the boom in the stock market, 178 00:17:43.260 --> 00:17:45.260 that was a signal that something was wrong, 179 00:17:45.260 --> 00:17:47.900 as far as the Austrians are concerned. 180 00:17:47.900 --> 00:17:51.520 And then it's after the panic sets in and the crash, 181 00:17:51.520 --> 00:17:53.380 that the Austrians say, yeah, it's painful, 182 00:17:53.380 --> 00:17:55.700 but that's actually the recovery, 183 00:17:55.700 --> 00:18:07.340 What's happening in a crash period is workers and resources are getting released from those sectors where they shouldn't have been in the first place, where they were just pushed there because of the Fed's manipulation. 184 00:18:07.340 --> 00:18:11.580 And so it's in the recovery period when all those workers are getting re-diverted. 185 00:18:11.580 --> 00:18:22.580 And so in a free society, you know, just think about it, how would you get, let's say you buy for the moment the argument that, yeah, there were too many workers in housing during the housing boom years. 186 00:18:22.580 --> 00:18:27.580 and there were too many smart people that were in the quantitative finance field. 187 00:18:27.580 --> 00:18:32.580 There was all this attraction to Wall Street, these PhDs in physics and so on. 188 00:18:32.580 --> 00:18:38.580 They could have been probing the depths of the universe and instead they were cranking out CDOs and stuff. 189 00:18:38.580 --> 00:18:44.580 So there was a sense, a great misallocation of the economy's resources. 190 00:18:44.580 --> 00:18:47.580 And so then the question is, well, how do you fix that? 191 00:18:47.580 --> 00:18:50.580 How do you get those people out of those industries and where they ought to be? 192 00:18:50.580 --> 00:19:20.580 Well, if you had socialism, you could just had, you know, the dictator order them and say, okay, tomorrow you guys who used to be, you know, putting shingles on a roof or whatever, now you're going to go do something else. You're going to go build roads in Atlanta, right? You could just order people around and there would be no recession. There would be no unemployment because everyone would just go do the job that the dictator assigned to them. But in a market economy, of course, people have the freedom to choose their occupations. And so the way that occurs when the economy has 193 00:19:20.580 --> 00:19:25.580 has been in an unsustainable configuration. The way it readjusts is there has to be a period of high unemployment. 194 00:19:25.580 --> 00:19:30.580 People have to get laid off from the sectors where it's just not profitable to have them, 195 00:19:30.580 --> 00:19:35.580 and then they're unemployed, and it's up to them to look around and say, what's the best thing I can do now? 196 00:19:35.580 --> 00:19:40.580 And if that happens to millions of people all at the same time, that's what we call mass unemployment. 197 00:19:40.580 --> 00:19:47.580 So again, in the Austrian view, it's the opposite of what we're used to, that it's the boom period where waste is occurring. 198 00:19:47.580 --> 00:19:52.900 The goal for policy makers, according to the Austrians, is not to say, gee, how can we 199 00:19:52.900 --> 00:19:57.740 keep the boom going, because no, every year the boom progresses, that just digs the economy 200 00:19:57.740 --> 00:20:03.260 deeper and deeper into this mistaken path, and it makes the bust that much worse. 201 00:20:03.260 --> 00:20:08.700 And by the same token, the goal is not to end the bust period from the Austrian point 202 00:20:08.700 --> 00:20:12.580 of view, no, it's to sit back and do nothing and let the economy cleanse itself from all 203 00:20:12.580 --> 00:20:14.340 those mistakes made during the boom. 204 00:20:14.340 --> 00:20:26.340 Okay, and again, the thing driving all that in the Austrian view is the central bank's manipulation of the interest rate because it's the interest rate in a free market that coordinates production and consumption over time. 205 00:20:26.340 --> 00:20:40.340 Okay, so that's the Austrian view. Specifically, when you say, what about the Great Depression? What happened there? You had a boom in the late 20s and if you want the full story, you'll have to buy my book that's available. 206 00:20:40.340 --> 00:21:10.340 I was going to tease you now with it. So there was, you know, there's an unsustainable boom. You saw the stock market rise. And again, the issue, most economists, so from your point of view, if here's a chart of US stock markets coming along the 20s, it's appreciating, okay, and then around 26, 27, it really starts taking off, and it gets real high, and then it just crashes in 1929. But if you looked at it, the depth, or sorry, the height of the stock market after it crashed in 29, was 207 00:21:10.340 --> 00:21:13.620 is not lower than it would have been if there had just been normal growth all through the 208 00:21:13.620 --> 00:21:14.620 20s. 209 00:21:14.620 --> 00:21:18.700 Okay, so the Austrians say it's not so much what made everything, you know, what pulled 210 00:21:18.700 --> 00:21:22.340 the rug out from the stock market in 29 for some reason, and so we're just going to focus 211 00:21:22.340 --> 00:21:26.060 on 1929 and try to figure out why did it all fall apart. 212 00:21:26.060 --> 00:21:30.820 The Austrians are going to say, no, what pushed it up to these incredible heights in 27 and 213 00:21:30.820 --> 00:21:32.740 28 and early 29? 214 00:21:32.740 --> 00:21:37.180 Okay, that's the difference in philosophy, all right. 215 00:21:37.180 --> 00:21:43.540 So now let's look at some of the two leading rival schools of thought. We've got the Keynesians 216 00:21:43.540 --> 00:21:49.340 as I say, and here the classic example would be Paul Krugman, Brad DeLong if you're familiar 217 00:21:49.340 --> 00:21:54.440 with him, but also Christina Romer who is the chairwoman of the Council of Economic 218 00:21:54.440 --> 00:22:01.440 Advisors to President Obama. So what they've been doing lately is people of course are 219 00:22:01.440 --> 00:22:06.700 concerned about these huge government deficits and they say, you know, gee the government 220 00:22:06.700 --> 00:22:36.700 I can't keep spending money like a drunken sailor and then of course other people say at least sailors spend their own money whereas the government's, you know, spending money that's not theirs and at least if you're a drunken sailor you're probably, you know, spending it on things that bring benefits to people whereas the government is like deliberately wasting money. So they say we're going to pull back and so the Keynesians trot out this argument and they say no no no you're ignoring the lessons of the Great Depression. They say what happened is Herbert Hoover in 221 00:22:36.700 --> 00:23:06.700 1932 got worried about the big budget deficit and he tried to cut the spending and raise taxes and that's why the depression got so much worse from 32 to 33 and then they'll also say in 1937, FDR made the same mistake, that things were going well when FDR was sworn in, the economy, you know, bottomed out and it was recovering very nicely and then things fell apart again in 37 to 38 and the Keynesians were like, and the reason is that FDR 222 00:23:06.700 --> 00:23:36.700 The Recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9 percent, unemployment fell from 25 percent to 14 percent, 223 00:23:36.700 --> 00:23:37.700 Research. 224 00:23:37.700 --> 00:23:42.060 Aside from the Second World War, the U.S. has never experienced such sustained rapid 225 00:23:42.060 --> 00:23:43.620 growth. 226 00:23:43.620 --> 00:23:47.500 And so the idea is, again, what was FDR doing, Romer is going to say, he was running big 227 00:23:47.500 --> 00:23:48.500 budget deficits. 228 00:23:48.500 --> 00:23:52.820 That's why things were going so well the first four years in office. 229 00:23:52.820 --> 00:23:56.940 But then she goes on, however, that growth was halted by a second severe downturn in 230 00:23:56.940 --> 00:24:01.340 37 through 38 when unemployment surged again to 19%. 231 00:24:01.340 --> 00:24:06.340 The fundamental cause of this second recession was an unfortunate and largely inadvertent 232 00:24:06.340 --> 00:24:11.780 Switch to Contractionary, Fiscal and Monetary Policy. Spending cuts and tax hikes reduce 233 00:24:11.780 --> 00:24:18.460 the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure. 234 00:24:18.460 --> 00:24:23.260 So the jargon aside, what she's saying is, again, when FDR first came in, he was running 235 00:24:23.260 --> 00:24:28.980 big budget deficits from the New Deal and those other ideas, and the economy is the 236 00:24:28.980 --> 00:24:34.260 best recovery in U.S. history, except for the recovery during the Second World War, 237 00:24:34.260 --> 00:24:39.200 And then things fell apart in 37 and 38 because Roosevelt, again, foolishly tried to rein 238 00:24:39.200 --> 00:24:44.260 in the deficit. So that's her diagnosis of what happened. Well, that just doesn't square 239 00:24:44.260 --> 00:24:47.440 up with the facts. So again, to talk like this, I don't want to throw too many numbers 240 00:24:47.440 --> 00:24:54.020 at you, but let me just try to give you a few to understand. So one way to see it is 241 00:24:54.020 --> 00:24:59.860 if the story is going to be the reason when FDR first came in, the economy recovered very 242 00:24:59.860 --> 00:25:05.660 quickly then because of these deficits well then it sort of has to be the case 243 00:25:05.660 --> 00:25:10.120 doesn't it that the deficit was much lower under Hoover than under FDR if the 244 00:25:10.120 --> 00:25:13.900 deficits were basically the same then it really wouldn't make sense to say the 245 00:25:13.900 --> 00:25:18.060 economy was absolutely awful the literally the worst in US history in the 246 00:25:18.060 --> 00:25:21.540 last year of the Hoover administration and then we had the second fastest 247 00:25:21.540 --> 00:25:25.220 recovery in US history when Roosevelt came in because of his big deficits that 248 00:25:25.220 --> 00:25:29.840 story doesn't really make sense if FDRs deficits weren't much bigger than Hoover 249 00:25:29.840 --> 00:25:37.000 And so, of course, they weren't much bigger. The last year of the Hoover administration, 250 00:25:37.000 --> 00:25:42.320 the deficit was about four and a half percent of GDP, okay? So don't for one minute believe 251 00:25:42.320 --> 00:25:48.000 when people try to convince you that Hoover was a balanced budget freak. No, he wasn't. 252 00:25:48.000 --> 00:25:51.200 He might have been a freak, but he wasn't a balanced budget freak, all right? That Hoover 253 00:25:51.200 --> 00:25:56.800 ran unprecedented peacetime deficits, okay? More than any president in U.S. history up 254 00:25:56.800 --> 00:26:02.840 Up till that point, Hoover was a big government man who said the federal government has a 255 00:26:02.840 --> 00:26:07.520 responsibility to help the economy when it's down and on the ropes. That was Hoover, so 256 00:26:07.520 --> 00:26:13.000 he spent money. It's true, FDR was a bigger interventionist, but FDR was the biggest interventionist 257 00:26:13.000 --> 00:26:18.760 in US history. Hoover was not a small government man. So again, Hoover's last year in office, 258 00:26:18.760 --> 00:26:24.780 there was a deficit, about 4.5% of GDP, which was a huge amount at the time for peacetime. 259 00:26:24.780 --> 00:26:30.740 I think it was unprecedented. Okay, the three years after Hoover's out, when FDR is in office 260 00:26:30.740 --> 00:26:37.060 and Christina Romer tells us we had this phenomenal recovery, the deficit is a share of GDP over 261 00:26:37.060 --> 00:26:43.460 that three-year period averaged 5.1% of GDP. Okay, so we're talking about a 60 basis point 262 00:26:43.460 --> 00:26:49.780 difference between unemployment of 25% under Hoover, the worst economy ever, and then the 263 00:26:49.780 --> 00:26:55.780 and the most phenomenal recovery, because of a 60 point increase in the deficit as a share of the economy. 264 00:26:55.780 --> 00:27:06.780 So again, my point is, that doesn't make sense, that they can't be right, that that little tweak in the deficit is the difference between the worst economy ever and the best recovery ever, the second best recovery. 265 00:27:06.780 --> 00:27:08.780 That just doesn't make sense. 266 00:27:08.780 --> 00:27:13.260 Then going the other way, we can look at the end of World War II, all right? 267 00:27:13.260 --> 00:27:17.540 So here, the government, of course, was spending a huge amount of money. 268 00:27:18.140 --> 00:27:19.860 It had had, in U.S. 269 00:27:19.860 --> 00:27:23.820 history, the highest deficit as a share of the economy in its history, you know, when 270 00:27:23.820 --> 00:27:25.300 the war was going full tilt. 271 00:27:25.980 --> 00:27:27.540 And then, of course, U.S. 272 00:27:27.540 --> 00:27:32.500 wins the war, starts calling the troops home and slashing its spending, right? 273 00:27:32.540 --> 00:27:36.940 And so a lot of Keynesian economists and Tom Woods has collected some really great 274 00:27:36.940 --> 00:27:42.540 Quotes on this that he can share with you, or if you go to Mises.org, I think in the 275 00:27:42.540 --> 00:27:46.460 media archives you can see Tom has read some really funny quotes from Keynesian economists 276 00:27:46.460 --> 00:27:51.140 at the time who were predicting the Great Depression is going to resume now, because 277 00:27:51.140 --> 00:27:56.020 in their mind the only thing that got us out of it was the huge military spending, the 278 00:27:56.020 --> 00:28:02.100 Keynesian pump priming that we were forced into because of Hitler, basically. Say what 279 00:28:02.100 --> 00:28:06.660 you will about Hitler, but at least he got us to fix our economy. That's the mentality. 280 00:28:06.660 --> 00:28:12.500 So then they were saying, now that the government's going to cut spending because of these moronic 281 00:28:12.500 --> 00:28:16.260 republicans and so forth in Congress who want to cut spending and think that government 282 00:28:16.260 --> 00:28:20.060 is like a business and it needs to cut back once the emergency's over, we're going to 283 00:28:20.060 --> 00:28:23.460 just get plunged back into the Great Depression again. 284 00:28:23.460 --> 00:28:26.820 Well, you would think that would happen, so let me just give you the numbers. 285 00:28:26.820 --> 00:28:36.260 The deficit in, what was it, 1945, was 21.5% of GDP, right, so just a huge fraction of 286 00:28:36.260 --> 00:28:41.100 of the Economy was being borrowed and spent by the government. Then two years later, because 287 00:28:41.100 --> 00:28:46.220 they had been slashing spending, obviously, after the war was over, the budget, the deficit 288 00:28:46.220 --> 00:28:53.220 was gone, the budget was in surplus, 1.7% of GDP. Okay, so again, huge swing from a 289 00:28:53.220 --> 00:28:58.500 21.5 share deficit to this slight surplus. So you would think, you know, we would just 290 00:28:58.500 --> 00:29:03.060 be plunged into absolute chaos, but no, there was no post-war recession. Technically, if 291 00:29:03.060 --> 00:29:10.460 If you look at the official dating committee, there was a recession in 1946, but again, 292 00:29:10.460 --> 00:29:14.220 that's mostly because the way they define it is they look at gross GDP figures and what 293 00:29:14.220 --> 00:29:15.220 changes. 294 00:29:15.220 --> 00:29:18.380 If the government stops spending so much, that's a huge component of GDP that gets knocked 295 00:29:18.380 --> 00:29:21.460 out, and so that's a recession, technically. 296 00:29:21.460 --> 00:29:25.980 But the unemployment rate in 1946 was all of 3.9%. 297 00:29:25.980 --> 00:29:26.980 and Business. 298 00:29:26.980 --> 00:29:33.460 Okay, so again, remember, the reason Hoover allegedly gave us 25% unemployment was he 299 00:29:33.460 --> 00:29:38.680 was too timid in deficit spending, and yet here, over a two-year period, the government 300 00:29:38.680 --> 00:29:46.300 has a, what was it, a 23-point swing in the deficit, and that, you know, gives a little 301 00:29:46.300 --> 00:29:50.500 pinprick of a recession, technically, that there was an unemployment rate of almost 4%. 302 00:29:50.500 --> 00:29:52.900 Right, so again, just the numbers, they're not even close. 303 00:29:52.900 --> 00:29:58.020 It doesn't make any sense to say that the reason we had that recovery and then the slump 304 00:29:58.020 --> 00:30:03.340 and then there wasn't a crash after the war has to do with deficit spending. 305 00:30:03.340 --> 00:30:06.600 The numbers, they're not even close. 306 00:30:06.600 --> 00:30:13.540 Let me move on to the other main explanation that you'll hear and that's, again, I'm sort 307 00:30:13.540 --> 00:30:15.340 of lumping all these schools of thought. 308 00:30:15.340 --> 00:30:19.500 Obviously there's new lines of differences between particular economists who would all 309 00:30:19.500 --> 00:30:26.500 The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit 310 00:30:49.500 --> 00:30:57.500 that the Fed has a lot of ammunition left. You know, why would they say the Fed has a lot of tonic left or a lot of, you know, medicine left? They don't say that. They say the Fed has a lot of ammunition left. 311 00:30:57.500 --> 00:31:09.500 And so that's, you wonder why is the Fed blowing up the economy. So, their view, again, is that what happened in the 30s, first of all, the stock market crash, they will typically say, is because the Fed tightened. 312 00:31:09.500 --> 00:31:39.500 The Fed tightened, that's what Milton Friedman and Anna Schwartz said, that the Fed tightened in 29, that caused a crash, and then the Fed, for some inexplicable reason, didn't inflate enough, prices started collapsing, banks started failing, and then there was just a vicious downward spiral, because the Fed didn't just come in and just print money like crazy, and that's what happened with the Great Depression, and then again, in our time, if only Bernanke would pump in more money. So the guy I'm going to pick is the representative of this train of thought, is Scott Sumner, now he's not a household name, 313 00:31:39.500 --> 00:31:53.500 I'm picking him to try to be fair, because he's actually a very sharp guy. He's actually very intellectually honest. I can have a discussion with him, and he'll concede some points, I'll concede some points, and it's not a shouting match. 314 00:31:53.500 --> 00:32:01.500 I'm picking him because I think he's a really good scholar, and so to give this argument its fairest hearing, that's why I'm drawing from his work. 315 00:32:01.500 --> 00:32:31.500 work. So he's working on a manuscript about the Great Depression right now and on his blog he posts little excerpts from it. So let me just read to you from some of his discussion. So this is Scott saying, I believe the Great Depression had two primary causes. One cause was deflationary monetary policies during 1929 to 33, and then from 37 to 38. And he also talks about some nominal wage shocks in the middle of the 30s due to the New Deal. And this is 316 00:32:31.500 --> 00:32:35.740 This is why the Great Depression lasted 12 years, ending about the time of Pearl Harbor. 317 00:32:35.740 --> 00:32:37.060 So I like this part. 318 00:32:37.060 --> 00:32:41.420 I don't know what ended the Great Depression, and don't really discuss it in my manuscript, 319 00:32:41.420 --> 00:32:44.700 but I suspect it had something to do with the German invasion of France. 320 00:32:44.700 --> 00:32:51.700 All right, so that's kind of, that'd be funny to put on somebody's tombstone, I think. 321 00:32:51.700 --> 00:32:55.680 And it says, this may have directly raised aggregate demand and indirectly increased 322 00:32:55.680 --> 00:33:00.140 expected nominal GDP growth by raising the expected inflation rate. 323 00:33:00.140 --> 00:33:02.060 Yours are usually inflationary. 324 00:33:02.060 --> 00:33:06.020 So I'm being a bit unfair by not giving you the full context of his views, but his idea 325 00:33:06.020 --> 00:33:12.660 is the Fed's job is to make sure that nominal GDP, which is not inflation adjusted, but 326 00:33:12.660 --> 00:33:17.540 just the actual dollar amount of GDP produced, he says just as long as the Fed keeps that 327 00:33:17.540 --> 00:33:23.260 growing year after year, that's what you need for a healthy economy, and in his opinion, 328 00:33:23.260 --> 00:33:29.860 the Fed didn't do that in the 30s, and then Bernanke didn't do it enough in our time. 329 00:33:29.860 --> 00:33:37.180 And then later on, a different post labeled, what caused the 1929 crash? Scott says right 330 00:33:37.180 --> 00:33:41.860 off the bat, I don't really know what caused the crash, but I think I have as good an explanation 331 00:33:41.860 --> 00:33:46.500 as anyone. All right? So again, it just, you see what I'm saying? That when I say he's 332 00:33:46.500 --> 00:33:50.100 intellectually ill, he's just coming forward and saying, I don't really know. So he doesn't 333 00:33:50.100 --> 00:33:54.420 know what caused the crash. He doesn't know what ended the Great Depression, but he's 334 00:33:54.420 --> 00:33:59.260 going to tell us the Fed should pump in a lot of money then and now, even though in 335 00:33:59.260 --> 00:34:03.560 in his story, he can't really get the beginning and the end right. Now, I only have, I think, 336 00:34:03.560 --> 00:34:07.360 one minute. Let me just jump ahead and give you some more numbers. This is actually good 337 00:34:07.360 --> 00:34:10.160 because I had a lot more numbers to throw at you, but you're being spared because of 338 00:34:10.160 --> 00:34:15.720 the clock. Again, let me just show you how, in my opinion, absurd this is. This doesn't 339 00:34:15.720 --> 00:34:20.540 make any sense. It's not even the same zip code, right? These numbers, they don't work. 340 00:34:20.540 --> 00:34:26.960 Again, this guy, he's blaming the slump back then and now on the fact that the Fed was 341 00:34:26.960 --> 00:34:34.960 and the way to see that is to contrast that Tom Woods has done this a lot in his work too with the 1920 and 21 depression. 342 00:34:34.960 --> 00:34:43.960 So again, I'm not going to be able to do it right now, I'm running out of time, but if you go and look there, the government slashed its spending by like 82% over three years because that was the end of World War I. 343 00:34:43.960 --> 00:34:53.960 The government totally cut spending, the Fed jacked up its interest rates to record highs, and you had more price deflation than any single year period in the 30s. 344 00:34:53.960 --> 00:34:56.860 So everything that the government and the Fed were supposed to do, according to the 345 00:34:56.860 --> 00:35:01.400 monitors and the Keynesians, they did the opposite of in the 20 to 21 depression. 346 00:35:01.400 --> 00:35:06.240 And as we all know, the 1920s weren't so bad economically, the roaring 20s, compared to 347 00:35:06.240 --> 00:35:07.240 the 1930s. 348 00:35:07.240 --> 00:35:09.600 Let me just give you one last factoid. 349 00:35:09.600 --> 00:35:14.000 So I emailed back and forth with Scott and asked him, I said, well, how come, you know, 350 00:35:14.000 --> 00:35:18.640 what did the Fed do right in the 1920, 21 depression to nip that in the bud and then 351 00:35:18.640 --> 00:35:19.640 have the roaring 20s? 352 00:35:19.640 --> 00:35:23.900 And he said, oh, because they expanded the monetary base in 1922. 353 00:35:23.900 --> 00:35:29.060 That's what got him out of it. And so I just ran the numbers. In the last quarter of 1922 354 00:35:29.060 --> 00:35:33.860 was the biggest growth of the monetary base, and that was an 11.1% annualized rate. So 355 00:35:33.860 --> 00:35:39.500 again, this guy who thinks it's all about the money supply, an 11.1% boost in 1922 was 356 00:35:39.500 --> 00:35:45.060 what saved the day. And he thinks nowadays Bernanke's just being too timid. In the first 357 00:35:45.060 --> 00:35:49.500 quarter of 2009, doing an apples to apples, the number, you know, what's the analog of 358 00:35:49.500 --> 00:36:19.500 The thing that did the trick back in 1922, according to this monetarist guy, was an 11% bump up in the money supply, and now Bernanke just did a 245% increase at an annualized rate, and his prescription is to say, well, obviously, Bernanke didn't inflate enough, because we're still in a recession, right? So, duh, Bernanke needs 359 00:36:19.500 --> 00:36:21.300 to Print More Money. 360 00:36:21.300 --> 00:36:24.180 Last sentence and I have to get off the stage. 361 00:36:24.180 --> 00:36:26.780 Is it just an empirical matter and the Austrians are just number crunchers? 362 00:36:26.780 --> 00:36:27.780 No, no, no. 363 00:36:27.780 --> 00:36:31.180 I have a theory, now go with me on this one, to explain these results, these crazy results. 364 00:36:31.180 --> 00:36:33.180 And my theory is, it's two pronged. 365 00:36:33.180 --> 00:36:38.180 First of all, the government seizing resources away from the private sector through borrowing 366 00:36:38.180 --> 00:36:40.940 and spending them doesn't make us richer. 367 00:36:40.940 --> 00:36:44.380 So that's sort of the way I explain these Keynesian results. 368 00:36:44.380 --> 00:36:49.300 And then as far as the, you know, to explain these numbers referring to the monetary experience, 369 00:36:49.300 --> 00:36:56.300 My other crazy theory is, printing up green pieces of paper with pictures of the president on them, doesn't make us richer. 370 00:36:56.300 --> 00:36:59.300 So, that's my theory to explain all this stuff. Thanks.