Bailouts Revisited

It's finals week here in Pittsburgh, which can only mean one thing: procrastinate instead of doing important things by doing less important things that I used to be...putting off doing.

Which means it's time for a blog post.

The initial damage reports are in from the bailouts: Taxpayers lost $61B on AIG, auto bailouts but gain on bank bailouts

Breaking it down,

• the government lost over $30B on AIG,
• lost over $30B on Chrystler and GM,
• and is projected (by the Treasury) to end up gaining $19.5B on the bank bailouts.

But don't worry, the $700B program has been extended through October, so there's still time for things to get worse.

Speaking of worse, the bailouts were a bigger blow to American taxpayers than the numbers imply. For one thing, insolvent banks weren't the only one's receiving TARP money. Healthy banks were forced to take it as well (the Fed didn't want TARP funds being more of a scarlet letter than they already were), and pay it back with interest. One wonders how much of that $19.5B was extorted from healthy banks.

And let's not forget the Cash-for-Clunkers program, which amounts to Auto Bailouts II: the Revenge.

But the real cost can't be encapsulated in a simple number. What the government has done is to give us a zombie economy. And if there's anything we Pittsburghers understand, it's zombies. I'm not usually a bit National Review fan, but let me point you for further reading to this article from February 2009: Caution: Zombie Economy Ahead. Imagine a horde of undead congresspersons shambling down Wall St. groaning "caaaaaaaaaaars," and you'll have a pretty good picture of what the country is going go look like for the next decade or so.

The more pessimistic picture is a Misesian crack-up boom, which would be the result of the Chinese and holders of petrodollars trying to cash in for assets, a process which would soon spiral out of control until people started burning Federal Reserve Notes to keep warm.

Teaching Austrian Economics to High Schoolers

Yesterday, I returned to my high school as a guest speaker. My captive audience was a class of Senior AP Economics students, and my topic was the Austrian Theory of the Business Cycle. An American History teacher, the head of the Social Studies department, and the principal all stopped by for all or part of the talk. I began by laying out two of the most distinguishing features of the Austrian School: (1) free markets are the best way to incorporate information spread out among multiple participants into a coordinated, cohesive economic system; (2) economics is properly deductive, not empirical. Their coursework covered Keynesian and Classical models, so I compared some of the beliefs of the Keynesians and the Austrians in a two-column point/counterpoint list. Then I told the parable of Paul Krugman on Sushi Island (from The Importance of Capital Theory by Robert P. Murphy). I concluded by giving a brief overview of the Austrian analysis of the Great Depression and the current financial crisis.

Then it was time for question-and-answer. This led to a discussion of the difference between a capitalist, socialist, and fascist economy. I explained that in my own opinion, the greatest risk posed by an Obama administration was not the ascendancy of socialism, but rather the emergence of a fascist-style economy: the union of corporate and government power, an activist government that picks winners and losers based on "national interest" and political connections, and a system of privatized profits and socialized losses.

Afterwards one student came up and asked me if I thought that we'd been starting to see economic fascism before Obama. I said "absolutely," and described the trend as going back as far as the '70s (in retrospect, the seeds were there ever before then). I pointed to Eisenhower's farewell address warning to guard against "undue influence" by the "military-industrial complex" as a warning against economic fascism.

The teacher who hosted me gave some concluding remarks which were gracious and open-minded. She told her students that she hoped they'd take away a realization that there were a lot of different ways to think about economics beyond what they'd learned.

The whole thing was filmed, and the high school's media center even edited my Powerpoint slides into the video. I'll be getting a DVD in the mail.

All in all, an excellent experience, and one I hope to repeat. I heard that the Social Studies department has been interested in some kind of curriculum enrichment on the economics of the Great Depression. I'm writing my honors thesis on the topic, so I might ask if I could contribute next time I'm in town .

Tea Party Hijacking

The media has picked up on yesterday's Tax Day Tea Party protests: Tens of thousands rally at tax day 'tea parties.'

The most important bit from the article:

While FreedomWorks insisted the rallies were nonpartisan, they have been seized on by many prominent Republicans who view them as a promising way for the party to reclaim its momentum.

"All you have to be is a mildly awake Republican candidate for office to get in front of that parade," said Grover Norquist, president of Americans for Tax Reform.

The movement attracted some Republicans considering 2012 presidential bids.

Well, this is problematic, yes? Republican presidential hopefuls are the last thing we needed at these rallies. It needs to be clear that the groundswell of anger in this country isn't being orchestrated by central planners affiliated with any party. Any attempts to hijack that anger must be resisted. Cheers to the San Antonio protest, which allowed no politicians to speak.

Republicans have a serious credibility problem when it comes to the economy. They drove the deficit through the roof for almost a decade. Well, some Republicans were way ahead of the game, but the party establishment basically laughed us off the stage. Did I mention way, way, way ahead of the game?

Sigh. There's another round of protests coming up, this time against the Federal Reserve. Republican leadership isn't really tuned into this issue yet, so hopefully it will be undiluted, and hopefully it will get media coverage as well.

To summarize some points I've made before--tax cuts without spending cuts won't get us out of this. Spending increases won't get us out of this. We need to drastically reduce the size and scope of the government, and we need to reform our monetary system. We need to reform Social Security and Medicare to address massive projected shortfalls, we need to end the wars in Iraq and Afghanistan immediately, and we need to audit the Federal Reserve. We need to allow bankrupcies and end bailouts.

Until the Republican leadership moves in this direction, it can shut up about the grassroots movement emerging in opposition to Obama.

"The Quiet Coup" from The Atlantic

If you want to understand the difference between capitalism, which I like, and "crony capitalism," which is really just a form of nascent economic fascism, read this article.

The Quiet Coup

The only critique that I would have to offer is that the author neglects to note the role of central bankers in creating economic crises. The piece should be a wake-up call to people who think that the current crisis represents a failure of capitalism. Capitalism didn't fail us--we failed it.