When you start one of these programs, it always seems as if you got a lot of things ahead
of you. And then when you get to the end, it seems, whoa, we're already at the end,
what happened? And so I've really enjoyed listening to the other speakers, as I always
do when I come to the Mises Institute. I've never failed to have a good time coming to
visit here. I love the people who operate the Mises Institute, the people who are associating
The people who are interested in it and of course the people whose support make it all possible.
So let me add my gratitude to the thanks you've received from other speakers before me.
I think you're helping to sustain some wonderful work and some work that has already been much more successful
Murray Rothbard died unexpectedly. He really was, while he was alive, the hardened soul of this operation and every program that we had here with Murray. Murray was the star, and I still miss him very much, and I know that he was a very, very, very, very, very, very, very, very, very, very, very, very, very, very, very, very, very, very,
and many others do too, but the beautiful thing is that the Mises Institute kept going without Murray and has given a wonderful account of itself since his death, which, again, time flies, it's been 15 years now, but a lot of great work has been done and I think even greater work lies ahead with your support, so please, if you can, support the Mises Institute, continue to do so,
I certainly will appreciate it, and I know Lew will, as will the others.
By the time we get to the end, your backsides are probably getting pretty well-worn.
So maybe it's a relief that we are at the last session here, but I feel a little bit wronged by this.
It's the first time I've ever complained about anything in my dealings with the Mises Institute.
but somehow to put me at the tail end of the program seems unfair because one it means that you've already got an opportunity to listen to some wonderful public speakers and public speaking is really hardly my strong suit but the other thing is that since we don't really coordinate these talks by the time you come to me you've already heard everything I wanted to tell you so maybe the good news
The good news is I won't need but five or ten minutes here and then we can all adjourn.
But at all events I wanted to talk about the current crisis.
I started writing about this just as it was unfolding and began to write about monetary
policy and credit policy and government fiscal policy and all the rest of the actions the
government was taking from the certainly from the middle of 2008 on in retrospect we can see that that important aspects of the crisis were already underway by that time but that's when it really captured my attention and so I've I started writing about it because I kept waiting for the experts to call attention to certain things that I noticed and I couldn't see that they were you know
I mean, where are all the people who really know about monetary policy and fiscal policy
and all these extraordinary actions the government was undertaking?
Why aren't they commenting, you know, where are these kingpins of the economics establishment?
I'm just a humble economic historian, academically speaking, and it's been a long time since
I've even been an academic, so I certainly wasn't a highly qualified person, but anyhow
Now I jumped in there because I saw a kind of vacuum and since that time I've just been
churning out one commentary after another and if you go to Lew Rockwell's archives
or Mises.org's archives or the Independent Institute's page where they list things that
I've written in the past few years, you'll find a whole bunch of these things. I don't
know if these trees add up to a forest, but at all events, it seems to me that the mainstream
economics profession in particular was almost struck dumb by the events of the past three
years. It's as if the reason they weren't saying anything is that they didn't understand
And what was going on? It was sort of a shock to them, I think, in many ways. When they
began to absorb what was actually happening, they couldn't understand why it would be
happening. It didn't look like the result of any of the models they would normally use
to analyze macroeconomics, for example. So why were these things happening? So they were
somewhat mute and eventually they did come around but the strange thing then was that
when they came around that they came around to reverting to a very infantile form of Keynesianism.
After decades in which the mainstream macroeconomics profession had thoroughly transcended that
old-fashioned type Keynesianism that started appearing in the late 1940s in Paul Samuelson's
and the Meat and Bread of Introductory Economics in American Universities
That's one hypothesis at least.
Well at all events, I've written a lot and I want to tell you about something I wrote
because most of these pieces have been fairly short and fugitive and focused on events of
the day, but I did write an article that was published in the spring this year in something
called the Harvard Journal of Law and Public Policy and it's available online, so if you
To get the spring issue of the Harvard Journal of Law and Public Policy, you can read my
organized thoughts about the current economic crisis, what brought it about, and how the
government reacted and what the consequences of those reactions are likely to be.
We're still in the midst of this crisis, so it's much too early to do an autopsy of this
Corp.
But nonetheless, I do refer you to that article for something more than an op-ed style commentary
from me.
Now, for today's talk, I thought I would kind of approach the subject of the current
crisis perhaps a little differently from some of the other speakers.
And I've been sitting here in fear for the last two days as they started to get right
Right up to my point, and some of them have certainly verged on it, but not quite developed
this in the way I want to right now.
That is, we've looked at a lot of government policies, and certainly for those of us who
know something about Austrian economics, these look like dumb policies.
They look like stupid, counterproductive policies that not only did not repair the crisis, but
that actually made it worse.
So in a sense, we can describe what the government has done and we can say, well, clearly these
are failed policies.
Here we are, we're almost three years since the official NBER beginning of the recession
in December 2007.
The unemployment rate is still near its peak for the past three years.
between nine and a half and ten percent and that's the official narrowly defined unemployment rate and if we add in people such as those people working part-time who say they would prefer full-time work and others who've perhaps given up looking for employment out of the belief that they're not going to find any we can generate a much bigger rate of unemployment perhaps twice as big as the official narrow rate so so
So, this is not a recovery at this point, and a lot of people have mocked the NBER's announcement
recently that the recession ended in the middle of 2009.
In a way, I think people have been too hard on the committee at the NBER because when
they say the recession is over, what they mean is that they've considered a variety
of Economic Indicators and taking them all into account in actually a very subjective
way. They've concluded that overall, all things considered, all things they've considered
being taken into account, the economy's movement is no longer downward. Now, what it looks
What it looks like to me is that that may be so, but it's not much upward either.
So it may be that for the past year and a half or so we've been at this very flat bottom.
Now that doesn't tell us anything about the future.
It may be that there's further decline ahead of us, or it may be that indeed things will
gradually get better.
I'm not a prophet, and so I can't give you anything that'll help you make your bets in
in the markets, but I won't be surprised if things get worse, and I won't be surprised
if things get a little bit better.
The only thing that would surprise me is that if there's a really robust recovery, because
I think in view of what the government has done, that's almost impossible to imagine
that the economy will have the ability to overcome all the discouragements and obstacles
that the government is put in the way of genuine recovery. So I think we may just be in for
a long period of stagnation and that would probably be my single best guess about what
lies ahead of us in the next few years.
I want to talk about these policies not, however, as failed policies.
That term, I don't know who invented the idea of failed policies, but I began to hear about
it a long time ago.
And people would criticize a variety of government programs.
They'd talk about, say, the war on poverty.
That's a failed policy.
The government has spent hundreds of billions of dollars in the war on poverty, and the
Percentage of people in poverty, according to the government's official measure, hardly
budges. It's hardly budged in 40 years. So you spend all this money, you had all these
programs and there's still all these tens of millions of people in poverty, at least
in official poverty. So that's a failed program. Or the drug war. People say, okay, they spend
all this money, they put millions of people in prison for a period of time, they have
millions of people out on probation for drug offenses, et cetera, et cetera, and yet drug
usage doesn't seem to be any lower than it was 30 years ago. Failed policy. Or education.
And spending per student in real terms has more than doubled in the last three decades
or so.
And yet if you look at measures of student performance, such as their scores on standardized
tests, they haven't come up appreciably at all.
They're still down at that level to which they fell in the late 60s and early 70s.
So public education is a failed policy.
Well, I think we need to step back and say, failed for whom?
And what I want to advance is a general proposition that I'll apply today to the government's
reactions to the present crisis, but we can apply it much more broadly.
And that is the proposition that the state does not stick with any policy that doesn't
work for the state very long. The state is capable of turning almost on a dime if the
state is not getting what it wants from the policy. And there's any amount of evidence,
anecdotal at least, to sustain this proposition. In the war on poverty, it was a kind of running
The War on Poverty
Poverty was a great deal for government employees and the people that got paid to do all the
things the government pretended it was doing to eliminate poverty.
So that was a great success and that's exactly why the war on poverty continues to this day.
Not all, but most of these poverty fighting agencies and programs continue and actually
The Drug War has been a fantastic success. I don't think there's a police department
in America that won't go to bat for it. There's hardly a politician in America who won't go
to bat for it. And if we could get out there and get their opinions, I don't think there's
There's a drug lord in the world that won't go to bat for it.
Because these are the major beneficiaries of the war on drugs.
Politicians, police, everybody from the local cops right up through the DEA head, and the
politicians and the gangs, the drugs that do the major drug trafficking in the Western
in Hemisphere, and bring these gigantic amounts of illegal substances into this country, as
well as, of course, we have all the production here within our borders of drugs.
So these are wonderful sources of income and political gain for these particular groups.
They don't want to give them up at all, and so they work very hard to lie to us, as Tom
Tom DiLorenzo was just explaining in the last talk about the effects of drugs and about
how successful their efforts are and so forth.
It's all baloney.
There's not a word of truth in it, you know?
It's like that famous statement Mary McCarthy made about one of her literary enemies, that
every word she writes is a lie, including a and and the, you know?
Every word the government says about drugs is a lie, including a, an and the. Education
is anything but a failed policy. You go check with the National Education Association, and
I dare say you'll find very few of the members of that group that don't fully support increased
Just funding from various levels of government for government education.
So when we see important political groups who have control of a program and the program
is working for them, that program persists.
If we see a program that doesn't work for them, they give it up and they go on to something
That's the nature of failed policies. The state doesn't stick with failed policies.
I think when we consider how the state operates, we need to do something that is rarely done,
which is to back up and consider what the state is trying to do. What is the objective
here? When we teach economics, we say the consumer has an objective in mainstream economics.
He's trying to maximize utility, and we write out an equation, we say he's trying to maximize
the value of that objective function.
What is the producer trying to do?
Maximize profits.
We write out a profit function.
We do calculus to find out exactly how that firm can maximize its profits and so forth.
So we have an idea when we do economic analysis, certainly, of what a certain class of actors
is trying to do.
Well, what is the state trying to do? I think it varies a little bit depending on which part of the state we look at, but certainly they have in common the idea that every part of the state would like to get more money at its disposal.
Now why they want more money and what they're going to do with more money varies a little bit.
The executive branch, and I'm going to describe the state in five parts, four of which constitute its core, and the fifth part constitutes what I call its outer layer.
The executive branch of government wants more power, basically, and of course it wants more money to dispose of,
because that's how executive government officials
make personally profitable political trades
with their supporters is largely by the use of money
they direct to their friends.
But they like power too even if there's no money
that goes along with it, they'll settle for mere power
if that's the best they can do.
So power and money, Congress wants mainly more money
But of course, if it creates new government powers, it allows itself to get more money and the more programs Congress creates, the more new laws it passes, particularly the bigger, more complex the laws are, the better position the Congress or a state legislature is in to practice extortion.
There's a, you know, a lot of people think that corporations and trade associations and so forth, they're vile, they go to government and they bribe them.
True. They do. Lots of people try to bribe public officials, especially legislators, in various ways.
It's not always cash in a plain brown wrapper. There are a variety of ways to bribe a member of Congress.
Some of them are actually legal, but a lot of what Congress is doing that people think is the result of bribery is actually the result of extortion, it's hold-up.
Congress says, we're thinking about passing a certain regulation or law, and then they wait for people to come and pay them not to.
There's a book by Fred McChesney about this very practice called Money for Nothing.
So when Congress doesn't do anything, it's because they're getting paid to not do anything.
And the minute they get paid more to do something is when they do something.
They're not fools, they know where their bread is buttered.
So Congress wants more money and more huge complex legislation is the best way to get
it.
The bureaucracy wants bigger budgets.
Bill Niskanen wrote a book back in the 60s called Bureaucracy and his working idea was
that the bureaucracy is simply trying to maximize its budget as that allows it to do all the
things it wants to do, hire more people, have plusher offices, more perks and so forth,
as well as push people around as regulators like to do.
And finally, the fourth element of the state's inner core is what I call the Palace Guards.
Literally, they're the people who carry weapons, the CIA, the FBI, the intelligence agencies,
the Department of Defense, the Department of Homeland Security.
These people all want bigger budgets.
They want more tasks.
They want more things they have to watch or keep under surveillance or crack down on or
Whatever. So no government can last very long unless it has palace guards to defend it because some other thugs will come along and take over if they don't have people who are willing to kill to protect those who employ them.
Now, finally, around this core of the state, we have the state's outer layer, which is the major private supporters, or what you might call fascist co-conspirators, a lot of big corporations, major lobbies, trade, labor, and professional associations. And these people are all angling to get a share of the loot. They want more money, they want their goods purchased at public expense, they want subsidies, tax favors, legal
So how did this work in the last three years? What did the state get, which justifies my saying, the state's policies have been enormously successful in the current crisis?
Well, first of all, I said everybody wants more money in the state.
Well, they've got a lot more money at their disposal now because government spending relative to GDP has gone up from 21% in 2008 fiscal year to 25% in fiscal 9 and 10 and probably 11 and 12 and so forth as we look ahead.
A jump of four percentage points of government outlays relative to GDP. This is federal outlays, which is an enormous jump for peacetime.
So this is a big gain for government in control over resources. We talk a lot about taxes, but the effective tax is measured by government spending,
not by the actual amount of revenue collected because even if the government
borrows the money or prints the money, the tax consists of the part of total
output that is being grabbed by the state through its purchases or in other
ways. So spending has gone way up. The government has given itself many new
powers to enforce, administer and use it as means of extortion. It's taken control
of some enormous private or semi-private institutions, including, most notably, Fannie, Freddie, AIG,
General Motors and Chrysler.
I mean, four years ago, somebody told you the government is going to take over those.
Would you have thought that very likely?
I would not have.
Even now, you know, I'm quite digested that the government just took over these enormous
corporations and essentially nationalized them, you know, sometimes not quite officially formally
nationalized, but through various hook and crook devices, they've taken control of these.
And Fannie and Freddie, of course, along with the FHA and Veterans Administration and Jenny
In May, that's the entire mortgage lending industry of America with very few exceptions.
They either make or guarantee or purchase over 90% of all the mortgage loans now being
made in the United States.
The mortgage finance industry has been taken over by the state.
Now think about who's connected to the mortgage financing industry.
has a lot of repercussions. All the people who build homes, manage real estate developments,
sell things that new homeowners would buy like furniture and what have you. These tentacles
spread out a long way when the government takes over control of mortgage lending in
in this country and it has done that. Through the TARP program, it took an ownership position
in almost 600 commercial banks and some investment banks that had quickly, virtually overnight,
made themselves into commercial banks in order to get TARP money. So we don't really have
any big investment banks anymore. People like Goldman Sachs are now commercial banks or
holding companies for that purpose.
So the big part of the banking industry was brought under even greater government control
than before.
Now Congress, of course, has passed huge statutes in the last couple of years.
They're very complex and big in some cases, and so it means that members of Congress are
are now in a much better position for their usual extortion, for money for nothing and
for money for something. So every time the scope of government pushes out, the people
who run the government are in a better position to plunder. The bureaucracy has grown by leaps
and bounds and in this I would include the Fed because as some of our other speakers
The Fed has dramatically changed its scope of operations from what it did historically.
Historically it undertook monetary policy, which was manipulation of short-term interest rates and the money stock.
But it did not do kind of financial industrial policy, that is, picking and choosing who would get its assistance.
It did activities that affected everybody in the same way, but now it's undertaken a whole
variety of programs in which the Fed has singled out specific types of financial industries
for assistance.
And all these alphabet programs that you see if you try to read a Fed report signify some
form of credit policy.
It's going to people who issue commercial paper, people who issue asset-backed securities,
people who do this, that and the other, and the Fed has basically gone out and given these
people deposits at the Fed in exchange for their crappy securities.
And so in that way, it actually assisted not everybody, but certain specific beneficiaries
or certain industries that benefited, but not others.
It was definitely picking and choosing.
So the Fed has greatly expanded its type of operations.
It's become much more of a central planner through the adoption of credit policy laid
on top of Monetary Policy.
So this is this distinction some people have drawn between qualitative easing and quantitative
easing.
And in the process, of course, it's more than doubled its portfolio and produced the
most astonishing graph I've ever seen as an economist, you know, the graph of excess
reserves in the commercial banking system, you know, which hugs the horizontal axis
for 50 years, and then almost instantaneously shoots up like an ICBM taking off in October
2008 through January 2009.
Over a trillion dollars in new reserves comes into being owing to the feds going out and
flinging money at these beneficiaries in the financial industries.
So that's a huge change and there's more that goes with that I'll come back to in a second.
The Health Care Act that Congress has passed makes everybody who works for Health and Human
Services feel as if he's died and gone to heaven.
Just imagine the increased scope of operation that those bureaucrats are going to have to
administer Obamacare.
Care. This law is over 2,300 pages of dense legal ease, and of course nobody still knows
what's in it completely, but we know enough to know that this is going to be hog heaven
for a big federal department as far as the eye can see. And of course some Republicans
are talking about repealing Obamacare, but I wouldn't bet the farm on that, nor would
And the Financial Reform Act passed recently. Again, more than 2,300 pages, very dense provisions,
obscure. We do know that it creates a variety of new powers for the Fed, for the Treasury,
and for other federal agencies, it creates whole new institutions, especially the Bureau
of Consumer Financial Protection, which gets scarier the more I read about it.
And this agency is going to have tremendous discretionary power.
It's lodged in the Fed, but supposedly is independent of the Fed, not answerable to
to the Federal Reserve Board, but its head is appointed by the President, but, you know,
some of these so-called independent regulatory agencies are not exactly completely independent,
and I believe the reason it's lodged within the Fed is because that's where the Fed wanted
it to be, where it can sort of dominate it and make sure that it doesn't do something
that the people who had the Fed itself don't want done.
But we shall see, it's another big crapshoot set in motion here.
Then there's the creation of this Financial Stabilization Oversight Council, which involves
a number of representatives from the Fed and various federal agencies.
And their charge primarily, there are many other charges, but their main charge is supposed
The theory is supposed to be that they look around for systemic risk, you know, like eagles.
There it is. And when they see systemic risk looming, they now will have the authority to go shut down that institution or firm or bank or whatever it is,
Anybody Involved in Financial Dealings Before They Fail and Set This Horrible Avalanche
of Systemic Risk Disaster in Train.
This reminds me of something Adam Smith said in his book, The Wealth of Nations, about
the audacity of people who would undertake to plan investments for people in business.
There would be a foolish thing for them to imagine they had the ability to do this and a dangerous thing if they were to do it.
And I think this financial stabilization oversight council, if it does anything at all, will do very mischievous things.
This is a new, as Roger Garrison would put it, a new loose cannon on the deck.
in the deck. And it's going to be another important reason why people making plans about
the future will be very uncertain before they launch any long-term project. Who knows what
these guys are going to do? If they have the authority to just come in and close you, you
don't have to be a bank. A variety of people involved in providing financial goods and
services will be within the jurisdiction of this council. The Financial Reform Act requires
According to one law firm, 67 new studies and 243 new rules. Don't you wish you were
a lobbyist now? 243 new rules. That's like, you know, open the doors, boys, and let those
lobbyists in. Of course, they're already there. They're like people who go to rock concerts
The Palace Guards have prospered mightily, even though the Defense Department had almost
is a doubling of its real budget in the previous decade.
It's still increasing its budget through this crisis.
Fiscal 1909, the basic Pentagon budget was $637 billion.
Fiscal 11, it's supposed to be $711.
That's a 13% increase in two years,
which is pretty much real since prices aren't changing very much
right now.
So that's a very healthy increase in Pentagon funding, and at the same time, we're supporting
now what I call the Security Industrial Congressional Complex, which consists of thousands and thousands
of firms that came forth in response to the availability of federal money for spying on
you, me and everybody else on earth.
And so these people, I had an article a couple of years ago on Lew Rockwell about this, just
astonishing how many firms are in this business of purporting to provide spying services of
some kind or another.
And the Washington Post had a three-part series on it recently in which they noted things
such as, you know, many tasks are being done by 8, 9, 10 separate firms or contractors
or agencies, no one of whom has any idea what the others are doing, but it doesn't really
matter because the important thing is that the money be handed out. That's the whole
idea of this, is to exploit our fears as usual in a crisis and to pass out loot in the process
of Pretending to Protect Us from All of These Boogeymen.
The Outer Layer, they've done fine, TARP doled out almost $200 billion to almost 600 commercial
banks, and notice I said almost 200, the TARP appropriated 700, but they never dispersed
nearly all of it they dispersed I think about 400 or so of the 700 and to banks only about 200
billion but that's still a lot of money where I come from and so Wall Street cleaned up and
they did it in a way by buying these preferred shares that you notice didn't dilute the ownership
of the Common Shareholders, ever think about that? That was slick, wasn't it? They actually
had done that in 1932 and three and four with the Reconstruction Finance Corporation, did
the same thing, went out and bought preferred shares in banks and insurance companies and
what have you. So that's one way that the government can bulk up the capital in these
State, local and federal employees have done very nicely during the recession.
Their pay has actually increased.
Their numbers have not fallen, even though some 8 million private employees have lost
their employment in the recession.
like the United Auto Workers and various suppliers for the auto industry have been kept alive and propped up thanks to TARP money and the government keeping GM and Chrysler going and of course the military industrial complex, they always do well, come hell or high water, the spending for procurement plus research development tests and evaluation which is all pretty much contracted out,
to private firms increased 5% between fiscal 09 and fiscal 11.
So the outer layer has done nicely, the core has done beautifully.
You and I have not done so well.
And I would just leave you with the thought that it just might be that none of this is accidental
and that this set of failed policies is anything but a failure.