I recently saw our fellow Austrian Peter Schiff debating a Keynsian. One of his main objections to our current economic system is that our economy is not production based, but spending based. But I also recently read that the USA is the worlds number 1 producer. How can one makes sense of this if the criticism of productivity is to remain valid?
Peter Schiff is broadly incorrect. If we did not produce more than we consume we'd be going through capital deaccumulation. This is not the case. All growing economies are "production based", because it's only through production that an economy can grow.
I'm not sure the context Peter was talking about, but I can try and elaborate on what I think he was saying. I believe Schiff was reffering to the fact that over the years (starting in the late 60s/early 70s) the U.S has moved away from a "production" based economy (one with savings, trade surplus, strong incentive for businesses to produce here) to the so called consumer service economy. Due to higher regulations/taxes in the U.S, manufacturing has moved to Asia because it is more efficient there. The U.S doesn't produce or save for everything it consumes, it borrows. We are able to import goods and borrow money while other countries (ex. China) pegs their currency to the dollar, holds our dollars (some 60% of M0 is held outside the U.S), and buys our bonds. Since the 80s, our budget deficits have exploded. Consumer debt and debt as a percentage of Household earnings rose considerably. Our yawning trade deficit shows no sign of correction. Our trade deficit isn't even the good kind of trade deficit (one where we import capital that will improve our country's productivity/capital structure to repay the bill later), but made mostly of consumer goods that will not enhance future productivity. Savings rates have plunged. Some of these things might have "improved" in the last year or so (consumer debt/trade deficit is down, savings rate is up), but thats not due to the U.S correcting its fundamentals but getting poorer.
We might be the world's largest economy/major producer/exporter, but taking into consideration all of our other problems we are a stagnating consumer economy. AFAIK, compared to most non thirdworld countries, our trade deficit problems, savings problems, consumer debt/government debt/foreign borrowing are very out of hand.
Joe,
Peter Schiff doesn't mean we need to make more stuff by imposing tarrifs. He means by making our stuff more competitive. As you say, by deregulation and loosening of labor laws and immigration laws [allowing people in without giving them free welfare and healthcare etc].
The point of making stuff here is that if we buy it from China, how are we going to pay them for it? The way it is now, they lend us the money to buy from them. Which is all well and good, until they wise up and realize we will never pay them back. So they will stop selling to us.
What will we do then? We won't be able to buy Chinese goods, we don't make our own, from whence cometh our salvation?
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
GooPC,
Sure. I would love to have a job as a philosopher, not getting my hands dirty, just paid to think whistful thoughts and maybe read comic books and watch the Twilight Zone.
Sadly, there is no demand for the job I want. Similarly. all the things you mention are great, but the ugly fact is that there is not enough demand for the product such jobs produce. There is great demand, however, for those smelly things the Chinese are doing.
The proof of this fact is that we buy 50 billion dollars a month more of their stuff than they buy of ours. Every month, for years and years.
Smiling Dave: Joe, Peter Schiff doesn't mean we need to make more stuff by imposing tarrifs. He means by making our stuff more competitive. As you say, by deregulation and loosening of labor laws and immigration laws [allowing people in without giving them free welfare and healthcare etc]. The point of making stuff here is that if we buy it from China, how are we going to pay them for it? The way it is now, they lend us the money to buy from them. Which is all well and good, until they wise up and realize we will never pay them back. So they will stop selling to us. What will we do then? We won't be able to buy Chinese goods, we don't make our own, from whence cometh our salvation?
Joe: I think that Schiff might have purposefully left it out in order to appeal to more people, because there are plenty of voters out there who would have had a gut reaction like, "hell yea, we need more factories" etc.
Schiff is just talking plane nonsense. Enough with the apologies.
Good luck to you
Smiling Dave: Schiff is just talking plane nonsense. Enough with the apologies. Good luck to you
I am not in the business of reading people's minds and interpreting between the lines. Schiff is explicitly invoking mercantalist fallacies. Either he does a terrible job of getting his thoughts across, or he needs to pick up a copy of the latest pocket edition of Human Action and polish up on his Austrian economics.
Edit: the same goes for Marc Faber.
AFAIK, Schiff is a free market Austrian. If he isn't, then the following doesn't necessarily apply to what Schiff is thinking, but nevertheless something that I think is true.
Schiff is right that the U.S needs to produce more "stuff", because it is clear that our current economic setup isn't working. We have regulated and inflated our way to a phony "consumer based" service economy. While it is certaintly economically possible (and feasible for the U.S in the future) to be a real service based economy, since the 70s the U.S tried to jump start that goal without the requisite savings and productivity. Through various regulations such as OSHA and other laws that overprice labor, environmental "protections" like our oil cessations in the west/Alaska, higher taxes and less business friendly rules relative to other nations, America effectively killed its comparative advantage in many areas of production. It is a profound wonder that one of the most naturally endowed nations in the world cannot use its resources to produce goods and jobs, and probably more efficiently than its cheaper/less productive emerging market competitors. The result of these disatrous policies is a heavily indebted nation that relies on foreigners buying debt in order to maintain its veil of artifical prosperity. If foreigners weren't there to support our burgeoning consumer trade deficits and pecuniary debts, then there would have been no way for the U.S to maintain such a high standard of living. Interest rates would have been much higher domestically due to a smaller supply of loanable funds. The high U.S demand for imports due to the lack of domestic production and weaker foreign dollar confidence would have lead to an even faster depreciating dollar. Without exporting dollars and having foreigners buy our bonds, the Fed would mostly likely have had to monetize more debt, leading to greater price inflation. All of these would have limited U.S growth and made it unable for many Americans to purchase cheap Asian products.
All Schiff is asking for is a return to the free market via less inflation, regulation, and taxes, reopening many once profitable industries, allowing the U.S to produce "stuff". This would increase savings and productivity, leading to a better standard of living in the long run. And perhaps after enough saving and a longer more capital intensive structure of production, the U.S could fully support itself through a service/high tech economy based on actual comparative advantage. But frankly I don't think that is possible right now.
Schiff is right that the U.S needs to produce more "stuff", because it is clear that our current economic setup isn't working. [...] While it is certaintly economically possible (and feasible for the U.S in the future) to be a real service based economy, since the 70s the U.S tried to jump start that goal without the requisite savings and productivity.
All Schiff is asking for is a return to the free market via less inflation, regulation, and taxes, reopening many once profitable industries, allowing the U.S to produce "stuff"
Great points, but Schiff doesn’t always make statements in this manner. I can’t cite any direct quotes right now, but in some interviews and in his book Crash Proof, he basically makes the claim that any nation at any time has to have a trade surplus to remain competitive.
When Schiff says that Americans need to make more “stuff” he often doesn’t preface his argument in the way you did. This leads to the implication that all service based economies as inherently not wealth producing and that only by “making stuff” can an economy grow and prosper.
Perhaps its because I read his book Crash Proof long ago (and haven't really kept up with his recent developments), I'm not 100% sure what he says. I know he spoke positively about trade surpluses, but I don't know if he said that a country has to have a trade surplus. Nor do I think he said every service based economy is phony, just America's because it is artifically supported and is not sustainable in a free market environment. If you have some quotes that say otherwise, than its all said and done, but for now I'll just take his statements as shorter versions of what I wrote.
Even if Schiff made some mistakes such as these, he is vastly better than any other financial analyst/quack that is on T.V these days.
He said a service based economy is fine, IF enough people buy the services and exchange them for the tangibles we need. But it's not happening. We have a huge trade deficit that increases every day, so obviously our services are not being snapped up by the world, and no one is making the tangibles here in the US. So where will we get them from?
A trade deficit means that you arent making enough to pay for what you are buying. Which means you are getting into debt. Since this debt is not to invest in capital, but to consume, how will you repay?
Schiff telling what AMERICA SHOULD do is first of all an appeal for a collectivist action (i.e. does not exist), and second of all is a proposition for an universally preferable behavior, that is if what is implied (by merely making such a proposition) and explicitly said (that not enough stuff is made - i don't know how much stuff is scientifically enough or enough according to Schiff) is true than we ought to start doing what Schiff prefers. the problem is that this proposition is not scientific, i.e. it is not Austrian economics, because what Austrian economics tell us is that government intervention is bad (lowers productivity) and what it does not tell us is that we should produce more stuff. so what Schiff says is not a scientific claim backed up by Austrian economics, he is just expressing his own desire for how he wants it to be. If he were to say something that actually can count for a scientific claim and not merely his opinion it should be something like this - "government intervention hampers economic productivity, so we can easily deduct that the lower the intervention is - the better economic effect there will be, so we ought to abolish (or at least lower) government interference in private individual's economic activity."
also as some other members on the board have written before me - an appeal for such a collectivist action can be interpreted as a call for protectionism (and other mercantilistic policies).
I am sorry for my bad Enlish. I hope that you didn't have hard time reading my text (if you have even made such an attempt)
Schiff telling what AMERICA SHOULD do is first of all an appeal for a collectivist action (i.e. does not exist), and second of all is a proposition for an universally preferable behavior, that is if what is implied (by merely making such a proposition) and explicitly said (that not enough stuff is made - i don't know how much stuff is scientifically enough or enough according to Schiff) is true than we ought to start doing what Schiff prefers. the problem is that this proposition is not scientific, i.e. it is not Austrian economics, because what Austrian economics tell us is that government intervention is bad (lowers productivity) and what it does not tell us is that we should produce more stuff. so what Schiff says is not a scientific claim backed up by Austrian economics, he is just expressing his own desire for how he wants it to be. If he were to say something that actually can count for a scientific claim and not merely his opinion it should be something like this - "government intervention hampers economic productivity, so we can easily deduct that the lower the intervention is - the better economic effect there will be, so we ought to abolish (or at least lower) government interference in private individual's economic activity." also as some other members on the board have written before me - an appeal for such a collectivist action can be interpreted as a call for protectionism (and other mercantilistic policies). I am sorry for my bad Enlish. I hope that you didn't have hard time reading my text (if you have even made such an attempt) I think it's more that he's pointing to the fact that we don't make as much stuff as a symptom of the government distorting prices and subverting incentives. I do agree, though, that he could do a better job of explaining Austrian theory. | Post Points: 20
Mises Pieces: Schiff telling what AMERICA SHOULD do is first of all an appeal for a collectivist action It is identifying a problem. We have a trade imbalance. We are importing 50 billion dollars a month more than we are exporting. And we are importing tangible objects. So he is drawing the obvious conclusion that the solution to this problem is to produce stuff ourselves. (i.e. does not exist), and second of all is a proposition for an universally preferable behavior, It is a universally preferable proposition that if you are consuming 50 billion dollars a month more than you are earning, that you should do something about it. that is if what is implied (by merely making such a proposition) and explicitly said (that not enough stuff is made - i don't know how much stuff is scientifically enough or enough according to Schiff) scientifically enough is when your trade deficit is less than 50 billion dollars a month. Ideally it should be zero. Even better is if you are a creditor nation, like China and japan and Germany. is true than we ought to start doing what Schiff prefers. the problem is that this proposition is not scientific, i.e. it is not Austrian economics, because what Austrian economics tell us is that government intervention is bad (lowers productivity) and what it does not tell us is that we should produce more stuff. Let me summarize what you are saying: 1. Anything that is not Austrian economics is not scientific. [absurd] 2. The only thing Austrian economics tells us is that govt intervention is bad [absurd] 3. Austrian economics does not say that if you have a trade deficit of 50 billion dollars a month, year after year, that you should do something about it. [absurd] so what Schiff says is not a scientific claim backed up by Austrian economics, Since I disagree with all 3 premises, I disagree with this conclusion. he is just expressing his own desire for how he wants it to be. I disagree with this conclusion for the same reason. If he were to say something that actually can count for a scientific claim and not merely his opinion it should be something like this - "government intervention hampers economic productivity, so we can easily deduct that the lower the intervention is - the better economic effect there will be, so we ought to abolish (or at least lower) government interference in private individual's economic activity." Actually he says this almost every single day. also as some other members on the board have written before me - an appeal for such a collectivist action can be interpreted as a call for protectionism (and other mercantilistic policies). When taken out of context, maybe. But if you bother to actually listen to what he says at length, you will realize that it is ridiculous to think that. I am sorry for my bad Enlish. I hope that you didn't have hard time reading my text (if you have even made such an attempt) I think you made your points quite well, even though I disagree. I think it's more that he's pointing to the fact that we don't make as much stuff as a symptom of the government distorting prices and subverting incentives. What you say is true, but he is saying more than that. He is saying that the trade deficit will bring the country down, because it cannot go on forever, China lending us money, and when it stops the results will be catastrophic. I do agree, though, that he could do a better job of explaining Austrian theory. Maybe if he was a professor teaching AE at a University this would be a legitimate concern. But that is not the job he has taken upon himself. He is trying to explain in simple language what our problems are, where we are headed because of them, and what you can do to protect yourself from the disaster that looms ahead. **** A word about my take on Peter Schiff and AE. First, he has said that one day it wont be called "Austrian Economics", but "Economics", because it is the only true economics. However, as everyone agrees, the core teachings of AE are theoretical. Ceteris parabis and all that. It is a whole 'nother story to leave the halls of the university armed with a knowledge of AE, and figure out what is going to happen in the real world. For example, plenty of people here know a lot of AE, but are confused about whether gold is a "bubble". Some have said it is just like the dot.com and housing bubble, others that there is no comparison, others openly confess ignorance. Understanding current events and predicting the future requires, [besides a knowledge of AE so that your head is not filled with nonsense about economics], great insight and perception about which of the many things going on in the world really really count. That is Peter's particular genius, and I for one feel very lucky to have him around to educate me.
Schiff telling what AMERICA SHOULD do is first of all an appeal for a collectivist action It is identifying a problem. We have a trade imbalance. We are importing 50 billion dollars a month more than we are exporting. And we are importing tangible objects. So he is drawing the obvious conclusion that the solution to this problem is to produce stuff ourselves. (i.e. does not exist), and second of all is a proposition for an universally preferable behavior, It is a universally preferable proposition that if you are consuming 50 billion dollars a month more than you are earning, that you should do something about it. that is if what is implied (by merely making such a proposition) and explicitly said (that not enough stuff is made - i don't know how much stuff is scientifically enough or enough according to Schiff) scientifically enough is when your trade deficit is less than 50 billion dollars a month. Ideally it should be zero. Even better is if you are a creditor nation, like China and japan and Germany. is true than we ought to start doing what Schiff prefers. the problem is that this proposition is not scientific, i.e. it is not Austrian economics, because what Austrian economics tell us is that government intervention is bad (lowers productivity) and what it does not tell us is that we should produce more stuff. Let me summarize what you are saying: 1. Anything that is not Austrian economics is not scientific. [absurd] 2. The only thing Austrian economics tells us is that govt intervention is bad [absurd] 3. Austrian economics does not say that if you have a trade deficit of 50 billion dollars a month, year after year, that you should do something about it. [absurd] so what Schiff says is not a scientific claim backed up by Austrian economics, Since I disagree with all 3 premises, I disagree with this conclusion. he is just expressing his own desire for how he wants it to be. I disagree with this conclusion for the same reason. If he were to say something that actually can count for a scientific claim and not merely his opinion it should be something like this - "government intervention hampers economic productivity, so we can easily deduct that the lower the intervention is - the better economic effect there will be, so we ought to abolish (or at least lower) government interference in private individual's economic activity." Actually he says this almost every single day. also as some other members on the board have written before me - an appeal for such a collectivist action can be interpreted as a call for protectionism (and other mercantilistic policies). When taken out of context, maybe. But if you bother to actually listen to what he says at length, you will realize that it is ridiculous to think that. I am sorry for my bad Enlish. I hope that you didn't have hard time reading my text (if you have even made such an attempt) I think you made your points quite well, even though I disagree. I think it's more that he's pointing to the fact that we don't make as much stuff as a symptom of the government distorting prices and subverting incentives. What you say is true, but he is saying more than that. He is saying that the trade deficit will bring the country down, because it cannot go on forever, China lending us money, and when it stops the results will be catastrophic. I do agree, though, that he could do a better job of explaining Austrian theory. Maybe if he was a professor teaching AE at a University this would be a legitimate concern. But that is not the job he has taken upon himself. He is trying to explain in simple language what our problems are, where we are headed because of them, and what you can do to protect yourself from the disaster that looms ahead. **** A word about my take on Peter Schiff and AE. First, he has said that one day it wont be called "Austrian Economics", but "Economics", because it is the only true economics. However, as everyone agrees, the core teachings of AE are theoretical. Ceteris parabis and all that. It is a whole 'nother story to leave the halls of the university armed with a knowledge of AE, and figure out what is going to happen in the real world. For example, plenty of people here know a lot of AE, but are confused about whether gold is a "bubble". Some have said it is just like the dot.com and housing bubble, others that there is no comparison, others openly confess ignorance. Understanding current events and predicting the future requires, [besides a knowledge of AE so that your head is not filled with nonsense about economics], great insight and perception about which of the many things going on in the world really really count. That is Peter's particular genius, and I for one feel very lucky to have him around to educate me.
Schiff telling what AMERICA SHOULD do is first of all an appeal for a collectivist action
It is identifying a problem. We have a trade imbalance. We are importing 50 billion dollars a month more than we are exporting. And we are importing tangible objects. So he is drawing the obvious conclusion that the solution to this problem is to produce stuff ourselves.
(i.e. does not exist), and second of all is a proposition for an universally preferable behavior,
It is a universally preferable proposition that if you are consuming 50 billion dollars a month more than you are earning, that you should do something about it.
that is if what is implied (by merely making such a proposition) and explicitly said (that not enough stuff is made - i don't know how much stuff is scientifically enough or enough according to Schiff)
scientifically enough is when your trade deficit is less than 50 billion dollars a month. Ideally it should be zero. Even better is if you are a creditor nation, like China and japan and Germany.
is true than we ought to start doing what Schiff prefers. the problem is that this proposition is not scientific, i.e. it is not Austrian economics, because what Austrian economics tell us is that government intervention is bad (lowers productivity) and what it does not tell us is that we should produce more stuff.
Let me summarize what you are saying:
1. Anything that is not Austrian economics is not scientific. [absurd]
2. The only thing Austrian economics tells us is that govt intervention is bad [absurd]
3. Austrian economics does not say that if you have a trade deficit of 50 billion dollars a month, year after year, that you should do something about it. [absurd]
so what Schiff says is not a scientific claim backed up by Austrian economics,
Since I disagree with all 3 premises, I disagree with this conclusion.
he is just expressing his own desire for how he wants it to be.
I disagree with this conclusion for the same reason.
If he were to say something that actually can count for a scientific claim and not merely his opinion it should be something like this - "government intervention hampers economic productivity, so we can easily deduct that the lower the intervention is - the better economic effect there will be, so we ought to abolish (or at least lower) government interference in private individual's economic activity."
Actually he says this almost every single day.
When taken out of context, maybe. But if you bother to actually listen to what he says at length, you will realize that it is ridiculous to think that.
I think you made your points quite well, even though I disagree.
Smiling Dave, thank you for the kind reply. I will try to respond you. First of all, when I wrote that Schiff telling what America should do I referred to the quote, let me peraphase : "we should produce more stuff". this saying clearly impies that by "We", since he is American he means American people, and by stuff he means stuff that is a product of an industrial production - i.e. tangible. This particular peraphase is not indentifying anything. It is a proposition for a collectivist action - what a particular collective (American people as a whole) should do (more). This saying of his is his reaction of a perceived problem - negative current account. The enormous trade deficit is a problem and he clearly refers to it in such a manner. But the question is what caused the problem? And when he says that we should produce more he does not refer to the cause but rather suggest one (his) resolution. The cause of the problem is government intervention and it happens and reveals in the current account and the capital account : A) the government itself accumulates debt to foreign countries and pays an interest on it. the payment of this interest to foreigners gets a negative sign in the current account (since investment income which includes interest is a part of the whole sum of the CA and USA government is a net debtor on interest payments to foreigners) B) the government hampers economic activity and makes doing business in America a hard job which causes a negative foreign trade in goods. C) individuals themselves owning debt to foreigners (all of it cheap dollars created by the fed then exported and then imported back again) D) the positive capital account is financed by government debt E) government intervention transforms capital structure and causes misallocation (that is similar to B - i.e. a structural change occurs but in B there is capital outflow and here is misallocation) As we can see we have got a single central entity that creates the circumstances for the three effects that are the cause for a big trade deficit. Now I can recall that I have listened to him saying not only "we should make more stuff", but also "government is too big and is obstructive to business" and "americans are too much levereged, they are indebted" and "the government spends too much and is indebted too". All these remarks are true and are in one or another way similar to A), B), C) or D). Then I guess I have nothing against him. But when speaking about the problem and its cause it is preferable that you choose not to make a statement like "we don't make ENOUGH stuff" because as you have pointed out it can be taken out of context and be used against you because "enough" by its own is subjective and relative, and can be interpreted politically incorrect. regarding this: "1. Anything that is not Austrian economics is not scientific. [absurd]" I did not mean this in any way, but I am sorry for impying it. "2. The only thing Austrian economics tells us is that govt intervention is bad [absurd]" I did not mean this and I don't see to have impied it. "Austrian economics does not say that if you have a trade deficit of 50 billion dollars a month, year after year, that you should do something about it. [absurd]" Austrian economics only informs us what will happen when the government distorts the price mechanism (interest rate), regulates like hell, and spends like crazy. It does not tell us whether we should prefer this state of affairs or another.
Vaduka,
I think the language barrier was greater than I imagined, because we seem to agree on most of the key points.