Category: Economics

Oh Krugman, You’re Always Good for Laughs

Paul Krugman has to be one of my favorite people in economics. Every time he speaks about economics, which is claims is his field of expertise, he says something so incredibly dumb that it makes one laugh our loud. In his latest opinion piece in the New York Times he claimed that Austrian economists are akin to cultists:

Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot. And as with all cults, the failure of prophecy — in this case, the prophecy of soaring inflation from deficits and monetary expansion — only strengthens the determination of the faithful to uphold the faith.

What makes this statement so funny is that every one of those accusations can be aimed at Keynesian economists. Keynesian believe they have access to a truth that generations of classical liberal theorists have somehow failed to discern. Even in modern times the followers of Keynes believe that war is good for the economy. What they fail to see, as Frédéric Bastiat pointed out in 1850, is that which is unseen. When a Keynesian sees a destroyed building they see economic stimulus waiting to happen. In their eyes rebuilding the structure will employ people and require materials, which will result in economic growth. They fail to see that the people and materials used to rebuild a destroyed structure could have instead been used to build a new structure. Instead of merely replacing that which was destroyed real economic growth, that is the creation of new wealth, could have occurred.

Keynesian also go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot. Whenever the programs they advocate fail they don’t admit they were incorrect, they merely claim that the program wasn’t done hard enough. When printing money (often referred to as quantitative easing) failed to stimulate the economy the Keynesians claimed that the Federal Reserve simply failed to print enough money. The Federal Reserve is now printing $40 billion a month because their last two bouts of printing new money failed to get the economy on track. Even with so much money being printed the economy continues to falter and the Keynesians aren’t admitting their theory is incorrect, they’re blaming the Federal Reserve for not printing more money.

Failing prophecies also strengthens the beliefs of Keynesian economists. Keynesians claimed that printing money was the solution to the economic depression and now that they’ve been proven wrong they hunker down and demand that more money must be printed. They never stop to consider that their predictions may be wrong. When it comes to economics Keynesians are the masters of demanding the same failing programs be tried again, only harder.

The best part of Krugman’s column is the final sentence:

It would be sort of funny if it weren’t for the fact that this cult has large influence within the GOP.

Honestly, that sentence would be sort of funny if it weren’t for the fact that it has absolutely no bearing on reality. Show me a single member of the Republican Party that has studied and advocates Austrian economics (and now that Ron Paul is retired he no longer counts).

Mainstream economics has failed, in part, because its practitioners try to shape economics facts to fit their hypothesis. Consider unemployment. Keynesians are quick to claim that the creation of government programs is the solution to increasing unemployment numbers. When the government created programs to employ people the unemployment rate failed to drop so the Keynesians in the state redefined unemployment. Entire sections of the unemployed population were removed from the statistic and that allowed the state to report improved numbers. The state now reports, what it calls, the U3 statistic, which doesn’t include individuals who have been unemployed for more than one year (removing those individuals from the statistic is justified by claiming those individuals are no longer looking for work and are therefore unemployed by choice). By massaging the numbers the Keynesians were able to make the economic fact of employment fit their hypothesis and therefore claim to be knowledgeable in economic matters.

Raising Minimum Wage

One of the things Obama urged during his State of the Union address was for Congress to increase the minimum wage to $9/hour:

He urged Congress to work with states to provide “high quality” preschool to all low- and moderate-income 4-year-olds, and he proposed raising the federal minimum wage to $9 per hour, up from $7.25 today.

Those of us who have studied the Austrian tradition of economics duly point out that increasing minimum wage also increases unemployment. Minimum wage laws create a barrier for entry, especially for those just entering the workforce and therefore unskilled.

Let’s look at minimum wage laws another way. If raising the minimum wage actually increases the average wealth of the lowest paid workers why stop at $9/hour? Why not make it $100/hour or $1,000/hour? Isn’t it time we stopped screwing around and made everybody millionaires? Wouldn’t that put everybody above the poverty line? No, it would make almost everybody in the workforce unemployable, at least legitimately. Most people don’t produce $100/hour worth of value let alone $1,000/hour. If raising minimum wage to $100/hour sounds preposterous and unworkable why do people think raising it to $9/hour is any different?

A Proposal to Save the Australian Government Time and Money

I don’t claim myself to be a financial genius but I believe I can save the Australian government a lot of time and money:

Three American companies-Apple, Microsoft and Adobe-have been summoned by the Australian Parliament to explain why they charge higher prices Down Under than in other countries.

My proposal is to call of the hearing because I can provide the answer. The reason Apple, Microsoft, and Adobe charge what they charge is because those are the prices people are willing to pay. It’s as simple as that. If I manufacture a laptop, charge $2,000 for it, and enough people buy my laptop to turn me a profit I find acceptable then I know I’ve set the right price. Unfortunately the Australian government is unlike to find, “Because those are the prices the market will bear.” as an acceptable answer.

War is Good for the Economy

Apparently the United State’s economy isn’t doing any better. Gross Domestic Product (GDP) is done, which is used by most economists as a measuring stick for a country’s economic performance. Of course I have a hard time believing such metrics are useful when I read things like this:

The economy contracted at an annual rate of 0.1 percent in the last three months of 2012, the worst quarter since the economy crawled out of the last recession, hampered by the lower military spending, fewer exports and smaller business stockpiles, preliminary government figures indicated on Wednesday. The Fed, in a separate appraisal, said economic activity “paused in recent months.”

Emphasis mine. Did you get that? The reason the economy is in a slump is because the United States government isn’t spending enough money bombing brown people overseas. If we only spent more on bombs, missiles, and other implements of war things wouldn’t be this bad. This is why GDP is asinine, it includes government and private spending. Any measure of a country’s economic performance that includes government spending should be dismissed outright as there is no way to know whether or not government spending is actually productive.

Living Beyond Your Means

Fiscally conservative individuals spend a lot of time lambasting individuals who live beyond their means. In this case living beyond your means simply refers to spending more money than you have available. American consumers hold some $11.38 trillion of debt with the average household owing $15,418 on their credit cards. Obviously Americans are spending beyond their means if the above definition is followed. On the other hand spending beyond your means may actually be a smart investment strategy due to inflation.

The rate of inflation reported by the federal government hovers around two percent at the moment. How inflation is calculated has changed over the years and if we go by the 1990’s calculation method we get a number hovering around five percent and if we go by the 1980’s calculation method we get a number hovering around nine percent. In other words the rate of inflation is notable, especially when you use older calculation methods (the federal government periodically has to change the method it uses to calculate inflation in order to make the numbers appear better than they are).

Inflation is an insidious beast. Monetary policy advocates claim that inflation is necessary in order to prevent individuals from hoarding cash. What inflation actually does is discourage savings, meaning real wealth isn’t preserved for later use. Ideally purchases requiring large amounts of wealth would be paid for through savings. In such a case real wealth is exchanged for a good or service. Inflation discourages such a practice and encourages the use of credit, which is currently nonexistent wealth that is promised at a future date. Knowing this, under conditions of inflation, one can argue that living beyond your means is actually an intelligent economic strategy.

Let’s say you make a dollar. If you spend that dollar immediately you can buy a widget but due to inflation that dollar will not buy you a widget at a later date. Obviously the widget isn’t devaluing at the same rate at the dollar since a dollar can buy one now but not later. In such a case converting that dollar to a widget makes economic sense, since you will be able to trade that widget for more dollars at a later date. Effectively the widget allows you to preserve wealth. Even if the widget devalues, that is to say it becomes worth less due to wear, tear, and obsoleteness, it may devalue at a slower rate than the dollar. Under such circumstances it would make sense to convert dollars to widgets just to preserve purchasing power.

Why would an individual stop there? Wouldn’t it be beneficial to use credit in order to convert future devalued dollars into current goods? If widgets don’t devalue it would be smart to obtain as many of them as possible immediately. Even if you have to buy them on credit it would make sense to do so so long as the devaluation of the dollar due to inflation is higher than the cost of interest. On top of that the dollars you use to pay back your debt will have devalued so you can use credit to purchase wealth preserving goods now and pay back the debt with dollars that are worth less. Even if the widgets devalue you may come out ahead if the rate of widget devaluation combined with the rate of interest on the credit is lower than than rate of dollar devaluation, especially when you consider that the credit will be paid back with those devaluing dollars.

We can add another wrench to this scenario by introducing debt forgiveness. Bankruptcy laws allow an individual to repudiate a great deal of their debt. Through the magic of bankruptcy an individual can buy a large number of wealth preserving widgets using nonexistent wealth then repudiate that debt. People will point out that repudiating your debt will damage your credit score, meaning you’ll have a more difficult time obtaining credit in the future. To that I would point out that any future credit would be worth less than current credit anyways. By converting dollars and available credit into wealth preserving widgets one is able to increase their purchasing power immediately, preserve it, and use it at a later date in lieu of credit. Bankruptcy laws don’t erase all credit, many government loans can’t be repudiated. This may not matter though. If one can erase enough of their debt to come out ahead in the end buying widgets on credit may be a smart decision economically.

The monetary system in the United States encourages living beyond your means. What incentive does an individual have to preserve cash when it’s constantly devaluing? If you spend money now you can buy more than if you waited. Furthermore if you take credit you can repudiate all or a portion of it through bankruptcy. Living beyond your means suddenly becomes a smart investment strategy because one can obtain actual goods and services for nonexistent wealth. Effectively you can get something for nothing.

Perhaps fiscal conservatives have been looking at things all wrong. Instead of saying that the economic problems we suffer under today are caused by individuals living beyond their means it may be smarter to place the blame on the constantly inflating currency and the ability to repudiate debt. An inflating currency encourages the use of credit instead of preserved wealth and the ability to repudiate debt encourages the use of credit that cannot be repaid.

Price Controls Lead to Shortages

Price controls are a mechanism that the state often employes to prevent market forces from setting prices on goods or services. Generally the state fixes prices below market value in order to incentivize the use of a good or resources. One of the recent alarms that has been raise as of late it a purported shortage of helium. The problem has become notable enough that some individuals are demanding a ban on helium-filled balloons:

Dr Peter Wothers, a fellow of the Royal Society of Chemistry and a University of Cambridge chemist, will use this year’s Royal Institution Christmas Lectures to argue that there will be “serious problems” in 30 to 50 years’ time if the lighter-than-air gas continues to be wasted in party balloons.

Helium is a non-renewable gas that is used to cool magnets in MRI scanners in hospitals. It is also mixed with oxygen to make breathing easier for ill patients and can help save new-born babies’ lives.

However, there is currently a global shortage of the gas, which cannot be synthesized. The gas has to be extracted from beneath the earth’s crust and 75 per cent of the world’s helium comes from the US.

If helium is in short supply then the price should be going up. As we know the more scarce a good becomes, with all other things remaining equal, the higher the price will go. So why hasn’t the price gone up? Because the United States government, the worlds largest supplier of helium, fixes the price:

The federal government, which sets helium prices, announced in April that helium prices would spike from $75.75 per thousand cubic feet (Mcf) in FY 2012 to $84 per Mcf in FY 2013. (Last year, prices rose only 75 cents.) This price spike, along with uncertain federal policy (and a peculiar industry setup to begin with), is threatening to create a shortage. Here’s what’s going on.

There is no need to ban helium-filled balloons in order to conserve the gas, simply remove the state’s meddling in helium prices. If helium is in short supply and in demand the price will increase and therefore the gas will be conserved. Let’s say the cost of a helium-filled balloon goes up to $10.00, would more or fewer people buy them? Fewer. Now let’s say the cost goes up to $50.00 per balloon, what will happen? Fewer helium-filled balloons will be purchased. People wanting to buy floating balloons will look for alternatives to helium which will free up the supply for other uses.

Conservation is a side effect of market prices, which is why I always roll my eyes when a so-called environmentalists demands the state enact prohibitions against the use of scarce resources.

Who Will Haul the Trash

When discussing anarchism with statists you must expect to have a wall of tired arguments hurled at you. The most common criticisms of anarchism come in the form of questions such as “Who will build the roads?” and “Who will haul the trash?” These criticisms rely on the idea that people are unwilling to perform actions in self-interest if those actions may benefit more than just themselves. Fortunately such criticisms are easily addressed by looking at the actions of individuals who have found alternatives to the state for basic infrastructure maintenance and trash disposal:

When the lamps illuminating Ralph Kelly’s street were switched off, he and his neighbours together paid the city about $100 to “adopt” a streetlight and reignite a shared bulb. There was also an “adopt a trash can” program, where the city supplied the bin but residents hauled the garbage to privately run participating dumpsters.

[…]

So when the government shut off the landmark fountain in America the Beautiful Park three years ago, non-profits and residents banded together to raise $25,000 to keep it flowing. When the city considered closing the innercity’s Westside Community Center, the Woodland Valley Chapel offered to manage it with only limited municipal support. That partnership, and others like it, continues to this day.

When the police force was slashed and Chief Pete Carey “needed to get innovative,” as he put it in an interview, volunteers became community service officers. They cost 60% less than police officers and can respond to non-injury traffic accidents or even burglaries so long as the thief has left the scene.

[…]

“What happens is that neighbourhoods with money started providing these services, while poorer neighbourhoods didn’t,” said Bob Loevy, a retired Colorado College politics professor who paid $80 to turn on his streetlight.

And when the city slashed park services, people noticed.

“I live near a park,” one Grade 8 student told the mayor during the recent townhall meeting. “The bathrooms there are ruined. There are no stalls or doors or anything. So when I go to the park in the summer and I want to go to the bathroom, there are no doors. It’s really awkward. Is there any chance you could maybe clean up the bathrooms in the parks? Make them a little nicer and maybe even supply some toilet paper?”

Statists will point to the streetlights in poorer neighborhoods not being lit and park restrooms not being clean or stocked with toilet paper as support for their claim that the state is necessary. Such a claim entirely ignores the fact that streetlights in poorer neighborhoods and well-maintained restrooms in parks are not actually desired. Consumers have to make numerous economic decisions every day. They have access to a scarce amount of means that can be employed to achieve their ends. As they don’t have enough means to achieve all of their desired ends they must prioritize. Consumers will essentially make a list of their wants and order them from most wanted to least wanted. There are many things I want including a Glock 21 Gen4, a Surly fat bike, and a functioning laptop. Since I don’t have enough means to achieve all of my desired ends, at least not all at once, I have prioritized my wants. The first ends I want to fulfill is getting a new laptop because I use my laptop to perform work. Second on my list is a Glock 21 Gen4 because it’s more attainable (i.e. cheaper) than the bike. Streetlights and park restrooms are ends and people must decide whether or not those ends are of sufficient value to delay or forego other ends.

Obviously people in Colorado Springs’s poorer neighborhoods haven’t given streetlights a high priority nor has anybody living in the town given a high priority to park restrooms. This demonstrates how the state distorts markets. Under the state’s rule streetlights were lit on every street and park restrooms were clean and had toilet paper stocked even though there wasn’t sufficient demand from the affect communities for either. On the other hand the people had enough desire for hauling away trash and security to implement systems to provide both.

When statists ask “Who will light the streetlights in poor neighborhoods?” or “Who will clean park restrooms and stock them with toilet paper?” the answer is nobody because there isn’t enough demand from the affected communities. On the other hand when statists ask “Who will haul away the trash?” or “Who will protect the community?” (I would like to know who protects communities now, but I digress) the answer is those who desire the services. Individuals will cooperate to achieve their desired ends. Few people enjoy living in squalor and will invest means to achieve the ends of a clean living space. Sometimes this involves hauling the trash to a dump yourself, sometimes it involves you hauling your neighbor’s trash away to avoid it affecting you, and sometimes it involves individuals volunteering to haul away trash for the entire community. Regardless of the means chosen the ends will be accomplished without coercive force.

The Evolution of Markets and Shopping Local

How many times have you heard somebody tell you to shop local? It’s a popular phrase among small business owners, college students, and hipsters. In fact the whole shop local movement (if you can call it a movement) is so popular Obama even takes a moment to exploit it for publicity:

He’s done it again! Indie bookstore surprise supporter President Obama visited a local bookstore on Small Business Saturday, the second time he’s touted the shopping local day (and bookstores) in as many years.

This year Obama took his daughters Sasha and Malia to One More Page Books in Arlington, Va., near Washington. The trio spent about 20 minutes in the store browsing through books and quietly conversing with other shoppers.

Too bad One More Page Books didn’t get one of those multimillion dollar contracts the government is so quick to toss to donors who make large campaign contributions, but I digress.

Let’s consider local bookstores for a moment. I love bookstores (and libraries, although fewer and fewer libraries actually have books in them so they are falling more and more out of favor with me) and books but even I have to admit that shopping at local bookstores, unless they’re specialty stores, isn’t an ideal experience. What is more convenient between driving to a bookstore to pickup a title or tapping a few buttons on your e-reader screen and having the book appear almost instantly on the device? For me it’s the latter by a wide margin.

Apparently I’m not along in thinking this because e-books are outselling physical books on Amazon. This brings up an economic reality being denied by those in the shop local movement; markets evolve. Just as the lightbulb ousted the lantern, automobiles ousted the horse and buggy, and computers ousted the typewriter e-books are ousting physical books. Nobody should be surprised by this as e-books are far more convenient than their physical brethren. I can have an e-book downloaded almost instantly to my e-reader, view my e-books on any number of electronic devices, carry every e-book I own with me at all times, and avoid setting aside space for more books. E-books are an evolution that bypasses many shortcomings of physical books. Of course e-books aren’t the only game in town and it’s unlikely they ever will be. Let’s consider the physical book market that, I believe, will always exist as a niche (some people prefer physical books just as some people prefer typewriters).

Technological progress has caused a great deal of trouble for local stores that have failed to evolve. Local stores are no longer competing solely with other local stores. Today everybody is competing with the entire world thanks to the Internet. The biggest competitor to local bookstores is are online bookstores such as Amazon. For those times I find myself buying physical books (usually because the e-book version is either nonexistent or more expensive than the physical version) I go to Amazon. Amazon offers a far better shopping experience than any local bookstore I’ve ever been to (and I’ve been to a lot of them). Many of the titles I read are relatively unknown outside of certain circles. These are books that most bookstores rarely stock. The reason large book sellers like Barnes and Nobel became so popular, and coincidentally put many independent bookstores out of business, is because they stocked a huge number of books. Stores like Barnes and Nobel were a market evolution that people like myself, who were often looking for oddball literature, greatly enjoyed. Now Amazon is the new market evolution that stocks even more books than Barnes and Nobel and saves me the trouble of driving to a store.

I was recently looking for some titles on the history of the Middle East. Since most Americans care little for history outside of events that have occurred in America or Europe finding titles on the history of the Middle East at local bookstores is an exercise in futility. My options were to order the book at a local bookstore or order it on Amazon. Had I chosen the former option I’d have had to drive to the local bookstore, find a staffer, tell them what I wanted, wait for them to find it and order it, drive home, wait for the book to arrive (which could take days or weeks), drive back to the local bookstore, and pay for the book plus any local taxes. I chose the latter which only involved me finding the book on Amazon, selecting a seller (I was buying a used copy because it was dirt cheap), and paying for the book (a whopping $0.01) plus shipping (a whopping $3.99 since it wasn’t fulfilled by Amazon and therefore ineligible for free Prime shipping). Shopping on Amazon took me far less time, didn’t require any gas (that’s worth a few greeny points), and allowed me to pass on paying taxes. It was win-win. This is what local bookstores have to compete against and they generally do a very poor job of it.

I mentioned that specialty bookstores can still offer a good experience. This is because specialty bookstores stand to fill niches in the market that generally go unfulfilled by larger market actors. Mayday Books is one such specialty bookstore that caters to people who generally lean towards the socialist side of the political spectrum. Most large bookstores aren’t going to carry a great deal of socialist literature nor will their staff have much knowledge about socialist literature. A store like Mayday Books stands to offer socialist literature that is hard to find elsewhere and the knowledge of staffers that know a great deal about socialism and socialist literature. On top of that the consumers Mayday Books caters to are more apt to buy from a store like Mayday. Mayday not only specializes in socialist literature it also proudly doesn’t make a profit. Although the staff of Mayday may not want to hear it their store is a perfect example of market specialization.

The shop local movement fails to address the fact that markets are constantly evolving. Because of the Internet the entire world is now local. In fact online stores like Amazon are closer to me than any so-called local store. Amazon literally exists in my living room and on my phone. I don’t even need to put on pants to shop at Amazon (that’s convenience)! Instead of telling people to shop local members of the shop local movement should be telling local businesses to evolve. Tell local business to setup a website for customers all around the world to shop on. Point them towards an unfulfilled niche in their market so they can fill it. Encourage them to innovate. Stop telling consumers to inconvenience themselves for the sake of local businesses. Businesses are supposed to serve consumers and therefore should be expected to improve their goods and services to better meet consumer demands.

We’re Already Over the Fiscal Cliff

The current story arc of Politics: The Reality Television Show for Suckers deals with the so-called fiscal cliff. Republicans and Democrats are trying to rally support for the causes of spending cuts and tax increases respectively. Anybody who has watched Politics for any length of time knows that these arguments are illusionary and that the Republicans and Democrats are working together to soak the people for more tax money without truly entertaining any idea of spending cuts:

Mr Obama meets business leaders at the White House on Tuesday and members of middle-class families on Wednesday.

He wants Republicans to accept tax increases on the wealthy, while extending tax cuts for families earning $250,000 (£155,000) or less.

[…]

John Boehner, the top Republican in Congress, has said he would consider increasing tax revenue by closing loopholes, though he remains opposed to raising taxes.

“Closing loopholes” is merely a fancy term for curtailing freedoms and, ultimately, an insidious way to increase taxes without technically increasing taxes. Effectively John Boehner has stated a willingness to cooperate with Obama but is using language that perpetuates the myth that the Republicans and Democrats oppose one another.

This is nothing new. What is worth discussing though is the idea of the fiscal cliff. The fiscal cliff, like the Republican-Democrat opposition, is a mirage created by the state. When politicians discuss the fiscal cliff they are actually talking about measures placed in the Budget Control Act of 2011 taking effect, which include supposed spending cuts and tax increases. The Budget Control Act, like the fiscal cliff, is also a mirage created by the state. It was supposed to be a compromise between the Republicans and Democrats to resolve budgetary issues facing the federal government. These budgetary issues can be boiled down to the fact the federal government spends far more than it bring in. Put into actual terms the federal government is insolvent.

Insolvency is the real issue facing the federal government and it won’t go away even with the most audacious tax increases. America has two options before it. Either spending must be slashed or the debt must be repudiated… again:

Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840s, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called “internal improvements”), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830s. Most of these securities were financed by British and Dutch investors.

During the deflationary 1840s succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in “readjustments.” Specifically, of the 28 American states in the 1840s, 9 were in the glorious position of having no public debt, and 1 (Missouri’s) was negligible; of the 18 remaining, 9 paid the interest on their public debt without interruption, while another 9 (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt. As in every debt repudiation, the result was to lift a great burden from the backs of the taxpayers in the defaulting and repudiating states.

[…]

The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870s and early 1880s under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction.

State debt has been repudiated in the United States before and it can be done again. Many people will claim that repudiating the debt would lead to catastrophe but that wasn’t the outcome of the above mentioned cases:

Rothbard’s History demonstrates how the repudiations of the 1830s and ’40s did not cause the sky to fall. In fact, the return to sound money coupled with a liberalization of the economy spurred a tremendous amount of growth. Rothbard explains:

It is evident, then, that the 1839–1843 [monetary] contraction was healthful for the economy in liquidating unsound investments, debts, and banks, including the pernicious Bank of the United States. But didn’t the massive deflation have catastrophic effects — on production, trade, and employment, as we have been led to believe? In a fascinating analysis and comparison with the deflation of 1929–1933 a century later, Professor Temin shows that the percentage of deflation over the comparable four years (1839–1843 and 1929–1933) was almost the same. Yet the effects on real production of the two deflations were very different. Whereas in 1929–1933, real gross investment fell catastrophically by 91 percent, real consumption by 19 percent, and real GNP by 30 percent; in 1839–1843, investment fell by 23 percent, but real consumption increased by 21 percent and real GNP by 16 percent. (p. 103)

Repudiating the debt had the opposite effect that most people would lead to you believe, it actually caused economic boon instead of of bust. Iceland, which recently repudiated its debt, is now experiencing economic growth as well.

It’s obvious that the federal government isn’t going to cut spending and it can’t tax its way out of the fiscal hole it has dug, which means the only other option is bankruptcy.

How the State Reduces the Cost of Making Bad Decisions

I’ve explained how the state reduces the cost of committing violent act but that’s not the only thing the state reduces the cost of. The state greatly reduces the cost of making bad decisions. Consider the state’s actions after hurricane Katrina. New Orleans, a city left devastated after Katrina, was constructed below sea level next to the sea. Normally a series of levies kept the city from flooding during natural disasters but those levies broke and the city was hammered. One might ask why building a city below sea level next to the sea is a good idea. Considering the expense of rebuilding the city and building new hopefully better levies it may not make sense. If the residents of New Orleans were forced to front the entire cost of rebuilding they may choose to relocate to a more sensible reasons. To help residents of that area avoid having to deal with the consequences of building there the federal government has chosen to sink a great deal of money into rebuilding.

After hurricane Sandy the federal government is swooping in again to help relieve people from the consequences of their bad decisions. Dauphin Island, a small speck of land in the ocean, has been destroyed by hurricanes before and Sandy didn’t show the island any special treatment. The federal government is providing funds to rebuild the island:

The western end of this Gulf Coast island has proved to be one of the most hazardous places in the country for waterfront property. Since 1979, nearly a dozen hurricanes and large storms have rolled in and knocked down houses, chewed up sewers and water pipes and hurled sand onto the roads.

Yet time and again, checks from Washington have allowed the town to put itself back together.

Across the nation, tens of billions of tax dollars have been spent on subsidizing coastal reconstruction in the aftermath of storms, usually with little consideration of whether it actually makes sense to keep rebuilding in disaster-prone areas. If history is any guide, a large fraction of the federal money allotted to New York, New Jersey and other states recovering from Hurricane Sandy — an amount that could exceed $30 billion — will be used the same way.

The state distorts reality. When common sense would lead most people to abandon dangerous property instead of constantly rebuilding it the state provides funding to alleviate people’s suffering from their bad decisions. Consequences that once seemed far too expensive to repeat the cause become bearable when the state foots a portion of the bill. This leads people to repeat the same mistakes again and again knowing that they will not be forced to deal with the entirety of consequences.