I think it’s nice that Murphy came around and is so able to change his mind and admit when he’s wrong. What gets me is how someone so well-versed in Austrian theory could miss something so bad. Actually Smiling Dave and I had a conversation about this some time ago in a pm (it includes links to a few of Murphy’s articles where he offers his “deficits aren’t inherently bad” case):
I don’t really get how people can’t understand it either. Or perhaps more accurately, in their vast knowledge of details, they miss the obvious. For example Frank Shostak is a well-versed Austrian. He’s an adjuct scholar at the Institute and his articles are top-notch. But if you see this one regarding trade deficits, he echos the same theme we heard quoted from Rothbard in that thread. He talks about how trade deficits aren’t inherently a bad thing. Fortunately he continues on to say that if they are caused by inflationary fiat currency created out of thin air by a Federal Reserve, then they are bad. But in his interest in dispelling the myth that deficits aren’t inherently bad or good, and (rightfully) pointing the finger at the Fed, he completely misses the other danger. Get what he states:
The fact that the Chinese producer has invested the dollars in American corporate bonds doesn’t pose any threat to American economic fundamentals. What we have here is a situation where claims on real savings have been channeled to America Inc. Once these claims are exercised and real savings are employed efficiently it only promotes a further expansion in US real wealth. Is anything wrong with this? All we have here is that instead of buying final American consumer goods, the Chinese producer buys future US goods .
Well hell. What if they US doesn’t produce any goods the Chinese want/can buy in the future? He completely overlooks this possiblity. Interestingly, Bob Murphy (another great Austrian) almost did the same thing in a response to Schiff’s book on the meltdown. Thankfully he conceded the possibility of an unsustainable deficit and that we basically have one…but only in the very end. Then, more recently in March of last year he addressed the issue more succinctly in this article . In that one he actually explicitly differentiates between types of debt: “Specifically, the problem occurs because foreigners can invest in ‘American assets’ to fuel either production or consumption.”
My problem is that like Shostak and others, it seems his focus is so geared toward dispelling the myth of deficits being inherently bad, that his articulation of ways they are bad is left wanting…So much so that readers who aren’t careful could easily fall into the trap of thinking we currently don’t have a problem. And I think that’s where some of these guys are. It’s like they’re at that point where they know just enough to get themselves into trouble…whereas if they read (and more importantly, understood, more books and Austrian theory) they’d see it most clearly. My guess is another facet of it is that they’re so used to pointing out how conventional wisdom is wrong, and being able to tell people they don’t know what they’re talking about, that they get carried away and forget that sometimes, conventional wisdom is actually right…sometimes deficits are bad.