It's not often that I debate. I usually don't like the emotional fireballs associated with debating in person. On the internet it's a different story. So I guess this post is to show you how stubborn people can be and to see what you guys make of it. So I saw a post on facebook about the debt ceiling and I decided to give a word. You can pretty much fill in the blank about what I said. I also proposed Bob Murphy's idea of selling off federal assets. Here's what my friend had to say:
...whatever cash we could obtain from selling the gold in fort knox is temporary, and would be quickly burned through at the rate we borrow money (125 billion a year). All your solution would do is postpone this debate for a little longer. As to the psychological damage, investors, and in particular speculators tend to take cues from the actions of the government, treasury, and federal reserve when they decide if they should buy government bonds, invest in national assets, or speculate in favor of the national economy. And a fire sale of selling gold at fort knox would surely push them away from investing in our government, or speculating in a positive way.
...whatever cash we could obtain from selling the gold in fort knox is temporary, and would be quickly burned through at the rate we borrow money (125 billion a year). All your solution would do is postpone this debate for a little longer.
As to the psychological damage, investors, and in particular speculators tend to take cues from the actions of the government, treasury, and federal reserve when they decide if they should buy government bonds, invest in national assets, or speculate in favor of the national economy. And a fire sale of selling gold at fort knox would surely push them away from investing in our government, or speculating in a positive way.
He's right about the first part. But I never said it would be a permanent solution. It will go however get us closer to 750 billion dollars. And I'm not even sure where the logic derives from in the second part.
The debate spurred from there to other things. Namely oil prices. I showed him a graph that demonstrated how the price of crude was inversely proportional to the dollar index and how the high price of oil is very much tied to the the federal reserves monetary policy. He rebutted by saying the price of international crude oil and us gas prices correlate to each other using this graph: http://na.oceana.org/sites/default/files/intl-crude-oil.jpg He used this as evidence that we are "at the mercy of international markets."
Continuing with this infinitely circuitous debate, he started talking about tax policy and specifically how Clinton's tax policies stimulated growth. I immediately accused him of demonstrating a post hoc, ergo propter hoc fallacy. I told him that the growth in the 90s should be remembered as the failure of Greenspan's monetary policy and not the success of Clinton's fiscal policy. He claims that unemployment rates declined throughout Clinton's presidency and that his tax policy was a causal factor of this. This is totally ridiculous.
We then went to jobs. I noted the failure of the current stimulus. I told him that a job is not an isolated and random creation by the government; jobs use of factors of production that are useful in nature. Factors of production aren't homogenous. You can again fill in the blanks where I told him why stimulus can't effectively create jobs. Of course he rebutted by saying, well we just need more stimulus! He said we needed another WPA.
I then demonstrated why we need to let wages fall to market rates in order to bolster employment. Of course he said that we shouldn't be paying people with such low rates. Since unemployment is so much better than being paid money.
I then told him why printing more money to cover a massive budget is bad. Again fill in the blanks. He used this story to rebut:
During the 1970s,the Sweenys were part of a baby-sitting cooperative (co-op) of young couples who worked for congress. It comprised of about 150 couples, all of whom were willing to babysit for one another. Because of its large size, there were plenty of potential baby-sitters, and plenty of potential babies to be watched. In order to manage it's large size, here is how the co-op worked. Couples were given coupons entitling them to one hour of baby sitting. When couples went out, they gave the appropriate number of coupons to the baby-sitters. Then, they could in turn use those coupons they get babysitting. This is very similar to the way cash flows (abet quite simplified). Think about it. Replace baby sitting coupons with money and you have the way cash flows throughout the economy. And because the system ensured that over time each couple would provide exactly as many hours of baby-sitting as it recieved, the system appeared shirkproof. But it wasn't that simple. Couples with several free nights in a row would try to accumulate reserve coupons for the future. And because there was a fixed number of coupons, this would result in a depletion of other couples' reserves. And over time, each couple would, on the average probably want to hold enough coupons to go out several times between bouts of baby-sitting. As a result, people began to look to accumulate reserves, and fewer and fewer coupons were in circulation. (So when you said that Americans need to learn to save more money, here's why this might not be the best idea). A peculiar problem resulted. Couples who felt their coupon reserves were insufficient were anxious to baby-sit (get cash) and reluctant to go out (spend cash) as to save. But because less couples were going out, opportunities to baby sit became harder and harder to come by, making couples even more reluctant to use their coupons, making opportunities even scarcer. So, the co-op went into a recession. Not because of "bad baby-sitting." Not because the co-op couldn't produce (hence why your argument, "We need to produce more, export more, and save more," doesn't hold up in the face of a recession. The recession was caused by a simple lack of effective demand. There was too little spending on goods (baby-sitting time) because people were trying to accumulate cash (baby-sitting coupons). Now, how did they get out of this vicious cycle? It was simple. The co-op increased the amount of coupons in circulation. The result was magical. With larger reserves of coupons, couples became more willing to go out, making opportunities to baby-sit more frequent, and so on, creating a positive feedback cycle.
During the 1970s,the Sweenys were part of a baby-sitting cooperative (co-op) of young couples who worked for congress. It comprised of about 150 couples, all of whom were willing to babysit for one another. Because of its large size, there were plenty of potential baby-sitters, and plenty of potential babies to be watched.
In order to manage it's large size, here is how the co-op worked. Couples were given coupons entitling them to one hour of baby sitting. When couples went out, they gave the appropriate number of coupons to the baby-sitters. Then, they could in turn use those coupons they get babysitting. This is very similar to the way cash flows (abet quite simplified). Think about it. Replace baby sitting coupons with money and you have the way cash flows throughout the economy. And because the system ensured that over time each couple would provide exactly as many hours of baby-sitting as it recieved, the system appeared shirkproof.
But it wasn't that simple. Couples with several free nights in a row would try to accumulate reserve coupons for the future. And because there was a fixed number of coupons, this would result in a depletion of other couples' reserves. And over time, each couple would, on the average probably want to hold enough coupons to go out several times between bouts of baby-sitting. As a result, people began to look to accumulate reserves, and fewer and fewer coupons were in circulation. (So when you said that Americans need to learn to save more money, here's why this might not be the best idea).
A peculiar problem resulted. Couples who felt their coupon reserves were insufficient were anxious to baby-sit (get cash) and reluctant to go out (spend cash) as to save. But because less couples were going out, opportunities to baby sit became harder and harder to come by, making couples even more reluctant to use their coupons, making opportunities even scarcer.
So, the co-op went into a recession. Not because of "bad baby-sitting." Not because the co-op couldn't produce (hence why your argument, "We need to produce more, export more, and save more," doesn't hold up in the face of a recession. The recession was caused by a simple lack of effective demand. There was too little spending on goods (baby-sitting time) because people were trying to accumulate cash (baby-sitting coupons).
Now, how did they get out of this vicious cycle? It was simple. The co-op increased the amount of coupons in circulation. The result was magical. With larger reserves of coupons, couples became more willing to go out, making opportunities to baby-sit more frequent, and so on, creating a positive feedback cycle.
Of course you can already tell that I've tried to explain ABCT to him. He tried to argue against it with something almost verbatim to what Krugman said. Something silly about how it is mathematically impossible to have a "consumer goods boom" in a recession. Of course people shift spending towards consumer goods and away from others. I also told him how credit contraction could cause the investment boom to subside. Here's where he demonstrates that he has a fundamental misunderstanding of the theory:
But if a monetary contraction can be the cause of disappearing investments and a weakened consumer market, then shouldn't the natural solution be to have the central bank inject more money into circulation? It should, and often it is (again, see the co-op example). And here is where the contradiction arises. You admit monetary contraction can be a major factor in a recession, but you say that injecting money into circulation is a horrible idea.
I don't even wish to comment on this.
I also cited Harding's reaction to the 1920 crash as a template for the correct reactionary policy, or lack thereof, to a crash. Of course he says, FDR did it right. World War II got us out of the depression. Where should I even start on this?
Please help me put this guy in his place. This is becoming a very taxing task, however not a difficult one, just an extremely petulant one.
Austrian business-cycle theory does not advocate credit contraction - even during recessions (though it suggests it would be inevitable) - nor does it require that 'the money supply' never increase. The problem is not that the central bank increases the money supply. The problem is that it is attempting to centrally plan the money supply and (therefore) the interest rate. But the central bank is faced with the same limitations of human knowledge that we all are - look at the YouTube videos of Ben Bernanke saying in 2008 that housing was definitely not in a bubble and, at worst, prices might flatten out. Oops. It turns out the Fed doesn't own a functioning crystal ball. As a result of its lack of relevant information and its inability to calculate, the central planner always chooses the wrong prices, that is, the central planner is constantly imposing shortage or surplus conditions - and often both simultaneously in different markets.
The answer is ridiculously simple. Permit money to be produced by the market. Then, the supply will adjust - upwards and downwards - with fluctuations in the demand for cash balances. And a major part of the role of the entrepreneur in the money production industry would be calculating what the demand for cash balances even is. Mises said there is no objective way to assess the general price of things. This means that the demand for cash balances (aka "the price of money") cannot be calculated through any objective method as the prices of all other things can be (simply by comparing their money price). So, we need entrepreneurs to take the risks and guess what the demand for cash balances is by means of investing - or liquidating investment - in the money production industries.
The same is true of the interest rate. In a free market in the production of money, there is a natural connection between the interest rate and the demand for cash balances which Guido Hulsmann explains here. So, money production, saving, borrowing and investing are all intricately connected activities which - like all other lines of production and consumption - crucially depend on price signals in order for the market to harmoniously coordinate the actions of many disparate individuals.
Clayton -
I think at this stage the only thing you can do is link to him some basic (Austrian) economics books/articles and be on your way.
I know what you mean. One guy I know said something like "looks like I'll be getting national default for my birthday..." And the response he got was:
I'm disappointed....Aren't you supposed to be an accountant?
1) Not raising the debt ceiling is not the same thing as defaulting.
2) Let's remember that the Treasury still rakes in quite a bit of money in revenues — it took in $617 billion (seasonally adjusted) in the first quarter of 2011. In FY 2010 the annual debt service was some $414 billion, working out to an average of about $104 billion per quarter. Although the numbers won't be quite the same going forward, the debt service will soak up only about one-sixth of the incoming revenues.
So there is plenty of cash flow for the Treasury to honor its existing debts, if a default would really be that catastrophic. Also keep in mind that even if the debt ceiling weren't increased, the Treasury could still roll over its debt as existing bonds matured. The only thing the Treasury couldn't do would be to issue more debt.
Result: de-friended.
But as for your situation, there are plenty of refutations of Krugman's "hangover theory" accusation:
(the best ones are bold)
Contra Krugman
In Defense of Austrian Theory
Epstein Responds
The Hangover Theory?
Did Capitalism Cause the Great Depression?
The Importance of Capital Theory
Austrians Can Explain the Boom and the Bust
Hangover Theory: How Paul Krugman Has Misconceived Austrian Theory
My Reply to Krugman on Austrian Business-Cycle Theory
(Longer list here)
As for the baby sitting co-op, it's just a terrible analogy. For one thing, the whole premise is based on a single currency, single good economy...and the single good isn't even a necessity. In an actual economy, people will spend some money. They have to live. And even if they some how manage to not spend any money and just collect it, in a free market, there's nothing stopping people from transacting in some other medium. And let's just think about that situation for a minute.
Each coupon is worth an hour of someone's time. Obviously, the original fixed number of coupons was based on the number of available hours the group had to offer. (If it wasn't it would be quite surprising they didn't have problems right away.) But let's suppose you print up more coupons in hopes that people will find the current ones less valuable (i.e. make the people not as interested in "hoarding" them). But wait a minute...each coupon is worth the same amount...regardless of how many there are, each on entitles you to an hour of someone's time. Why in the world would someone all of a sudden value an hour less than they did before? And what's more, people were "hoarding" them so that they could redeem them all at once and get a long break, right? The whole reason the coupons worked was because the whole coupon supply represented the number of available hours. If 50 couples end up accumulating most of the coupons, they can still be assured there is enough people available to fulfill the obligation. Suppose you print up a bunch of coupons. And now all of a sudden, all 150 couples have a stash that entitles them to a full weekend of babysitting. Even supposing they find a way to communicate and coordinate and work it out taking turns, at any given time, at the minimum, every single couple has 2 days worth of coupons.
Two questions:
1) How exactly does this stop people from attempting to still save up coupons to try and get a full week off?
2) How long do you think the couples would put up with having coupons they can't redeem on demand? (i.e. there are so many coupons floating around, there has to be actual scheduling and planning involved, and people have to basically wait their turn...whereas before, the coupons functioned like an on-demand purchase.)
As for the Depression, New Deal, and WWII, there's plenty for that:
Keynesians and the Postwar Economic Boom
"World War II Did Not End the Great Depression"
"The Fake History of the Depression"
"I Wrote the Guide to Extend Rothbard"
lectures:
Thomas E. Woods: The Truth About American History (10) (specifically "The Great Depression, World War II, and American Prosperity, Part 1 & 2")
And of course there's these:
Can we start a support group for debating statists?
I know how you all feel when trying to debate these tools. I have been going round and round with a cousin-in-law about the debt ceiling.
After I took the time to explain how taxes equate to theft his response was...
"We don't elect muggers."
This coming from a guy with a good education. It baffles my mind how narrow minded and un-thinking people are.
TANSTAAFL, it mainly revolves around psychological, emotional, personal issues on statists' part. The best way I can see to understand your cousin-in-law's response that "We don't elect muggers" is that he really means the following: "I refuse to accept that I've elected people who turn around and [however indirectly] steal from me, because [insert psychological consequences here]."
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
I also think people are reluctant to be accepting of new ideas since they've taken so long to bury themselves in hole so deep they can't even see what else there is to offer on the surface. They just see the sky. It's pretty clear that they have an emotional attachment to their efforts. It even gets to the most rational and dispassionate people.
Wha? Well why didn't you say so? I mean that changes everything. What have I been wasting all my time being suspicious of government for? Jeez. That would have been helpful to know a long time ago. I'm glad he was able to enlighten me.
Seriously though, send him a link to George Ought to Help.
Ad hominem is appropriate in these situations to attempt to point out a general deficiency in their reasoning. For example, I like to point out the difference between problem-solving aptitude and critical thinking. The former is often confused with a general "educatedness" or "smartness". However, a truly well rounded education must include critical thinking skills which means the ability to analyze the arguments that people make critically, that is, with a critical eye towards the person making the argument as well as the argument itself. We tend to do this naturally when we buy a car. "The 7.0XL comes with the luxury package and I think you'll love it, it's a better value for the price than the 5.0A you were looking at on the other side of the showroom." When a salesman tells us we'll get more for our money if we just spend more, we naturally become skeptical and ask ourselves whether he's benefitting more than we are.
But when it comes to political and social problems, the ability of most people to think critically - to consistently apply the question cui bono - is seriously deficient. Mine certainly was until just 3 year ago when I started learning economics and Austrian thought. I started to realize that vast swathes of what people think they know (including myself) can be skewed, distorted and spun if it suits the purposes of very powerful groups and individuals with the resources to move public opinion and thought. I gave up a long time ago on actually changing anyone's mind. Better to just content yourself with planting the seed and hoping it grows. I just point random things out or ask questions that, if pursued, lead to the inevitable conclusions. Learning is self-discovery, so people believe the truth when they discover it for themselves.
Clayton:Ad hominem is appropriate in these situations to attempt to point out a general deficiency in their reasoning.
Let's go back to this...
Rebuttal of the Hangover Theory in simple language over at my blog:
http://smilingdavesblog.blogspot.com/2011/07/krugman-and-hangover-theory.html
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Rebuttal to the baby sitting co-op here:
http://mises.org/Community/forums/p/22525/396081.aspx#396081
4 reasons why the analogy is flawed. In other words, those coupons are as full of holes as a swiss cheese.
I also debunked the liquidity trap concept in part of my rebuttal against the co-op analogy