-- Posted Monday, 17 September 2012 | | Disqus

By George Smith

On September 13, economist Frank Shostak had an article on Mises.org about the upcoming “fiscal cliff,” which he explains this way:

The "fiscal cliff" refers to the impact of around $500 billion in expiring tax cuts and automatic government-spending reductions set for 2013 as a result of successive failures by Congress to agree on some orderly alternative method of reducing budget deficits.

The impact, according to the CBO, is that the federal deficit could fall by nearly half (43%), from $1.128 trillion in 2012 to $641 billion in 2013.

How should we interpret this projection? The IMF and CBO think it’s a looming disaster. But the IMF and CBO are not staffed by Austrian economists. Shostak:

Ultimately what matters for the economy is not the size of the budget deficit but the size of government outlays — the amount of resources that government diverts to its own activities. Note that, because the government is not a wealth-generating entity, the more it spends, the more resources it has to take from wealth generators. This means that the effective level of tax here is the size of the government and nothing else.

The projected decline in government spending for 2013 is $9 billion, which follows a projected decline of $40 billion for 2012. You would think commentators would zero in on 2012’s decline rather than 2013, Shostak notes.

But wait - if it’s true government takes things out of the pot without putting anything in, why would so many people be afraid of a reduction in government outlays? If the “pot” represents a snapshot of a society’s total wealth, with net revenue streams feeding it, wouldn’t it make sense to slap government’s hands for scooping up whatever it wants? Yes, it would if the dominant economic theories were free market instead of Keynesianism. In the Keynesian world, government doesn’t have to do anything useful to create jobs and prosperity, since, as Paul Krugman says, we’re in a liquidity trap. By paying people to dig holes and fill them back up it puts real food on the table because those hole-workers will spend their money and induce farms and factories to grow more corn and produce more razor blades. It’s not just the dirt diggers powering the recovery, either - it’s everyone they trade with, thanks to the Keynesian spending multiplier. As economist George Reisman notes, “The multiplier and its benefits are allegedly restrained only by the disappearance of funds into the ‘leakage’ constituted by saving.”

Shostak then addresses the issue of expiring tax cuts - will we have less purchasing power in 2013? You might think the answer is straight-forward: More for government means less for us. But given the expected reduction in government outlays, Shostak argues, the tax increase will be “like a tight monetary policy.”

A tighter monetary stance in this respect should be seen as positive for wealth generators since it weakens various bubble activities that sprang up on the back of past loose monetary policies.

By this logic if you end up paying more in taxes next year you have reason to feel good, sort of. You may not be able to save as much or go out to dinner as often, but on net you’re better off because the sub-group of market participants who qualify as wealth-generators will have a lighter economic burden because of the decline of certain bubble activities.

One supposes that if the tax increase were greater yet, more bubble activities would cease, and the result would be even more positive for wealth generators. But if taxes continue to rise, at some point the monetary stance would become so tight it would strangle the process of wealth-generation. The tax increase, therefore, is harmful to all economic actors, with the possible except of the government.

Put another way: If the taxed individuals are wealth generators they will have less money with which to invest in capital goods. Other things equal, they will produce less, not more. Taxes may put the bubbles on the sidelines, but they also hurt the wealth generators.

It’s hard to see how a tax is a net positive, at least for the taxpayer.

Here Comes Hyperinflation?

Another issue to surface this past week was inflation, the scary kind, as in destruction of the currency. On September 12 Greg Hunter published an interview with Shadowstats founder John Williams, who predicted a dollar sell-off leading to digital wallpaper by 2014. When Ben Bernanke announced a day later that the Fed would run the printing presses until the unemployment rate improved, it seemed like fulfillment of a prophecy.

But will Bernanke print until the currency is no longer money? Does that statement square with Williams’ acknowledgement that the Fed’s primary concern was “propping up the banks”? How does turning the U.S. dollar into wallpaper help Citibank or Bank of America? How does it help businesses produce, hire, and innovate when money becomes so plentiful it is more profitable to use as toilet paper?

More likely Bernanke will print and print, and print some more, then stop. He will stop short of killing the dollar. The bankers want to be able to buy things with their billions. He will stop, and by then smart investors will be perched atop foreign currencies and precious metals as they watch the politicians flog the lifeless horse that was once our economy.

Bernanke may be acting suicidal but I don’t believe he’s thinking that way. He’s merely thinking like the Keynesian he is. More spending is the great panacea. People will not sit on cash if they think it’s getting worthless.

Paul Krugman says Bernanke is behaving in a manner consistent with his advice to “credibly promise to be irresponsible.” By this he means Bernanke cannot get people spending unless they expect higher prices. Monetary policy, therefore, should seek to instill this expectation. Promising to print an additional $40 billion a month indefinitely might get them shopping in a panic.

But if they shop for precious metals, their strategy will have backfired.

Conclusion

Keynesians have been running things since the 1930s. They are blind to oncoming train wrecks and spin their chronic failures with “too little, too late.” The business cycle is a mystery they blame on the market rather than past interventions. For them, the heart of the economy is a government-supported banking cartel that proudly distorts prices and a profligate Congress that blows the roof off its debt limits. They are the enablers of a government that is growing more intrusive in every area of our lives. Keynesians are bringing civilization to its knees, while being called on to save it.

I occasionally find it helpful to recall the words of my instructor, Dr. Robert P. Murphy, as he concluded a Mises Academy course on Keynes, Krugman, and the Crisis last year:

Ask yourself: What would the world look like if Keynesians were totally wrong?

It would look like it is today.

George Smith

-- Posted Monday, 17 September 2012 | Digg This Article | Source: GoldSeek.com

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