Rothbard on Schiff

Economics Economics Questions
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1

A short quote from Rothbard…

Myth 4: A major cause of the crash was the big trade deficit in the U.S.

Nonsense. There is nothing wrong with a trade deficit. In fact, there is no payment deficit at all. If U.S. imports are greater than exports, they must be paid for somehow, and the way they are paid is that foreigners invest in dollars, so that there is a capital inflow into the U.S. In that way, a big trade deficit results in a zero payment deficit.

Foreigners had been investing heavily in dollars–in Treasury deficits, in real estate, factories, etc.–for several years, and that’s a good thing, since it enables Americans to enjoy a higher-valued dollar (and consequently cheaper imports) than would otherwise be the case.

But, say the advocates of Myth 4, the terrible thing is that the U.S. has, in recent years, become a debtor instead of a creditor nation. So what’s wrong with that? The United States was in the same way a debtor nation from the beginning of the republic until World War I, and this was accompanied by the largest rate of economic and industrial growth and of rising living standards, in the history of mankind.

http://mises.org/econsense/ch48.asp

2

Doesn’t it matter what you are using the debt for? It doesn’t seem to me that that reason is to build “factories” and increase productivity. Instead, it is to consume. And also, it isn’t foreign investors plugging the trillion + dollar deficit, now it’s the Fed.

3

  1. no one argues that it’s great, as long those furriners are stupid enough to accept our paper money. The problem is that one day they are going to wise up. then we will have empty shelves at walmart, and we don’t make nearly enough stuff here.

  2. the difference between now and the marvelous 1800’s is that then the US borrowed to invest. Thus we grew our productive capacity, made money, and paid everyone off, plus had a profit.

Now we are borrowing to consume.

It’s the difference between young Steve Jobs borrowing money to build Apple computers, and his roomate borrowing money to buy weed.

I don’t know what the situation was in 1987, when Rothbard wrote that article, but it doesn’t matter. Either in his time the US was also borrowing to produce more, or else he was making a big mistake.

In any case his main point, that the crash then was not caused by a trade deficit, is true. Foreigners were giving us their goods in exchange for paper money then, which, as stated above, is fine as long as it lasts.

4

Your excerpt is part of a commentary on the 1987 stock market crash, not Austrian economist Peter Schiff specifically. However, it is relevant because he and Peter Schiff seem to differ on the significance of trade deficits.

Rothbard claims foreign investment in dollars is good because it raises U.S. living standards, but there is difference when this is motivated because the U.S. economy is fundamentally sound versus bubbly.

Regarding Rothbard’s view on being a debtor nation, any nation can be both a debtor and creditor nation. The issue is whether the debt is manageable. The U.S. has spent much more than it can ever repay without massive inflation or debt renegotiation. In the past, the U.S. has had little to no national debt. Today, the U.S. is approaching financial self-destruction. Here is a 30-minute summary of the 2008 documentary film I.O.U.S.A. To summarize it, the U.S. cannot pay its bills. In 2010, USA today reported, “Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds. At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010. Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs. The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. “This is really important,” Grimes says.”

The only reason the U.S. has not financially self-destructed is due to the confidence of foreign investors in the U.S. Once they realize the U.S. is a subprime borrower, they will cut their losses and the financial pain will become dramatic.

5

Is it Schiff’s stance that the crash was caused partially by the trade deficit? I think his position is that it is responsible for U.S. job destruction, not necessarily a contributing factor in the crash, but instead that it is slowing down the recovery. And not even in a direct way, but as a result of pro-consumption, anti-saving, anti-business government policy.

6

I know. The hope was that the reader would catch on. Rothbard passed away long before Peter Schiff became popular.

7

This has nothing to do with Schiff. He doesn’t say the trade deficit was a cause for the crash.

8

resist,

Almost everything you say is spot on. But for one little thing. The deficit is not responsible for job destruction, but vice versa.

9

I think the point is that Rothbard said “There is nothing wrong with a trade deficit.” but that Schiff disagrees. Schiff says the deficit is not sustainable and that it contributes to the “phony economy.”

10

That is not a disagreement. Those are two different things.

11

That’s Schiff’s problem with the current trade deficit with China and he wants it to end ASAP. So he does think trade deficits can be bad. Not that they are uniformly bad.

12

Your excerpt is part of a commentary on the 1987 stock market crash, not Austrian economist Peter Schiff specifically. However, it is relevant because he and Peter Schiff seem to differ on the significance of trade deficits.

Schiff is not an Austrian. Even if he appears to disagree with Rothbard on this detail, he’s best described as a Rothbardian, complying generally with Rothbard’s non-Austrian fallacies about monetary theory.

Rothbard is certainly correct about there being no such thing as a trade deficit. We trade dollars for goods. This is a win/win exchange, where the giver always thinks he’s getting the better part of the deal. As has been pointed out innumerable times, we all have a trade deficit with Wal Mart, and are the better for it.

Rothbard’s pretty good on most non-monetary issues, where he’s standard free market economics libertarian.

The U.S. has spent much more than it can ever repay without massive inflation or debt renegotiation.

Wrong. Laughably, hugely mistaken.

During pretty much every economic downturn, static analysis makes the debt look unfixable. In fact, it was just as apparently true when Rothbard was writing that, and guys like you and Schiff were saying exactly the same thing.

It was even more true in the late seventies.

The only thing we need, to make the debt magically become soluble again is rapid, healthy economic growth. We can easily outgrow the debt, as the economy’s size makes it appear irrelevant.

In fact, in 1994 the Clinton administration pretty much declared the deficit impossible to overcome, which meant the debt would someday explode.

Then, just a year later, the Republicans took over, gridlock occurred, government was therefore gotten out of the way, and the economy grew so rapidly that the deficit vanished, mostly on its own…not really because of the Republicans doing much to check spending, other than not expanding it as much as Clinton would have if he’d retained control of Congress.

In the past, the U.S. has had little to no national debt.

The last time we had no national debt was in the 1830s. 180 years ago.

It’s also worth note that the means of getting to that state had the side-effect of the worst economic depression in the country’s short history of that time.

13

OOPS, EDITED

14

The only thing we need, to make the debt magically become soluble again is rapid, healthy economic growth.

Great. And the only thing a frog needs to magically not bump his ass when he hops is wings. I think the key word in both of these situations is “magically.”

In fact, in 1994 the Clinton administration pretty much declared the deficit impossible to overcome […]

Then, just a year later[…] the economy grew so rapidly that the deficit vanished, mostly on its own…

Do you actually believe that the dotcom/Nasdaq bubble economy of the 1990s was an example of “rapid economic growth”? And what’s more, do you seriously believe the budget “surpluses” of the time were anything other than legerdemain? I’m surprised that a poster on this forum would fall victim to such fallacy.

15

Welcome, John James. Way to go.

16

Kaz, what is your definition of an Austrian economist? Peter Schiff and Murray Rothbard are identified with the Austrian school, according to Wikipedia. Peter Schiff has been interviewed on the Lew Rockwell show and his columns have appeared on LewRockwell.com. Rothbard has an archive on LewRockwell.com.

Here is a roughly 8:00 minute video showing the multi-trillion dollar cost of U.S. entitlements (Medicare, Medicaid, and Social Security) cannot be paid. Here is the transcript. That interview was in 2007.

The so-called balanced budgets of the Clinton years were misleading.

The National Debt is the total amount of money owed by the government; the federal budget deficit is the yearly amount by which spending exceeds revenue. Add up all the deficits (and subtract those few budget surpluses we’ve had) for the past 200+ years and you’ll get the current National Debt. Politicians love to crow “The deficit is down! The deficit is down!” like it’s a great accomplishment. Don’t be fooled. Reducing the deficit just means we’re adding less to the Debt this year than we did last year. Big deal – we’re still adding to the Debt. When are we going to start seeing the Debt actually go down?

NewsBusters associate editor Noel Sheppard pointed out that the U.S. debt increased each year of the Clinton presidency, according to the U.S. Treasury Department. When PolitiFact (which sometimes is accurate) asked Sheppard about his claim, he said:

“If the public debt during those years was bought with other debt – meaning by the Social Security trust and the Federal Reserve – we didn’t actually pay down any debt, did we? If you take out an equity line of credit on your home to pay off your car loan, your debt didn’t decrease. Furthermore, if you take out an equity line of credit to pay off your car loan and buy a boat, it would be deceitful on your part to say you reduced your debt, right? This is what happened those four years: We did retire some debt held by the public, but we did so by increasing debt held by the government and the (Federal Reserve). That’s not retiring debt. That’s just shifting it from one lender to another.”

17

How does any of that make them Austrian?

They do/did not follow Austrian methodology, they depart(ed) completely from the logic sequences the actual Austrians were using, rather than progressing on those, et cetera. Rothbard distorted it not only by completely failing to understand monetary theory, getting Mises wrong and ignoring all other Austrian thought, but also by abandoning the Value-Neutral requirements, turning Rothbardian thought into a cultish, dogmatic “liberty is moral” issue, akin to the very Objectivism he so despised.

18

Kaz, when Rothbard began writing “Man, Economy, and State,” he wrote a sample chapter about money and credit that was explicitly approved by Mises (cf. David Gordon, “The Essential Rothbard,” p. 14). Does this mean Mises didn’t understand his own monetary theory?

And if Rothbard “didn’t follow Austrian methodology” and “ignored all other Austrian thought,” how come Mises wrote (http://mises.org/efandi/ch36.asp) the following:

“In every chapter of his treatise, Dr. Rothbard, adopting the best of the teachings of his predecessors, and adding to them highly important observations, not only develops the correct theory but is no less anxious to refute all objections ever raised against these doctrines.”

19

See, that’s why people start describing Rothbardians as cultish and dogmatic.

I gave specific arguments, about his departure from the Value Free condition of Austrian philosophy, for example, and your response was to claim that a Higher Authority said he liked what Rothbard wrote. You didn’t explain how his advocacy of liberty as a form of morality could somehow be compatible with the value free philosophy…it’s as if your proof that the Bible is the word of God is the Pope saying so.

Well, not even that, because nowhere in what you cite does Mises actually say that it’s sound Austrian methodology. Only that he really likes it, and considers it a contribution to praxeology, human action, and economics. But I’m sure he considered the efforts of Friedman a contribution to those things, too…even though Friedman certainly didn’t stick to them enough to be Austrian in methodology.

He did, though, come closer than Rothbard.

20

Attribution game! play it!!!