Dear Friends,
It seems to me, Trump will be better served by using a blend of Austrian economics and follow Calvin Coolidge’s example, rather than continue using Keynesian economics as did Obama, Bush and Clinton. If the definition of insanity is to do the same thing expecting different results, then following these President’s with their combined track records of economic growth, lost liberty and cultural decline. That path leads inexorably to societal collapse. Turning around a leviathan so bent on it’s own destruction is a monumental task, a task that doesn’t lend itself to half measures and following the crowd, even nudging a leviathan the size of the US government a few degrees, takes a herculean effort. If Trump really wants to go down in history as the Marcus Aurelius of our time his first order of business is to cut spending, eliminate whole agencies of government, deregulate and cut taxes. If he were to push that through, as Obama did Obama care, the US economy would burst back to life, wages would rise rapidly, opportunity would be everywhere and as a result, the scourges of civilization would subside.
In a nutshell, the Austrian school of economics is based on the allocation of capital, (in what money is invested) in an economy. They see the boom bust cycle as a function of ever greater misallocation of capital leading to a recession where capital is reallocated to more efficient endeavors. The implications of Austrian school economics is that artificially low interest rates are a great incentive to misallocate capital. The longer interest rates are kept low the greater the misallocation of capital there will be, but more pernicious still, that misallocation of capital can be sustained, for a time, by those same low interest rates! Another implication of the misallocation of capital is that productivity growth, the generator of the rise in our standard of living, is eroded. When capital is well allocated however, invested efficiently, productivity will rise, innovation will become the norm and a commensurate rise in the general standard of living will ensue.
Keynesian economics is based not on, where capital is invested and spent, but how much capital is spent. Keynes thought it doesn’t matter what money is spent on, it can be buried in the ground and dug up again as far as he was concerned and the effect would be the same, economic growth. The implications of Keynesian economics is that since it doesn’t matter how, or who spends the money, economic growth can be achieved by more spending. So that creates an incentive for government to borrow and spend. The more government borrows and spends, the more economic growth there will be and the happier the people because the people are getting both economic growth and presents from their benevolent government. Problem is, as we see before us all too well, is that borrowing is always misallocated. Spent on waste, cronies, buying votes, chaining people to the dole, absurdities like studying why Lesbians are fat, and self aggrandizement.
All that foolish spending of borrowed and taxed money starves innovators of capital, industries of entrepreneurial leadership and runs up debt at a pace that cannot be sustained. Interest rates must be kept low, else the interest on government debt become impossible to handle and government is forced to resort to extreme measures, like printing money to service the debt, (as they are doing now to hold down interest rates). The long lived misallocation of capital the US has engaged in, Japan, China, Europe and many other nations across the planet as well, has led to an unbalanced economy, diminishing standards of living, and the stifling of innovation.
Regulations are the kudzu vines of government, invading and choking every industry, smothering otherwise healthy companies, and the bureaucracy soaking up all the intellectual capital. Taxes are the brakes on the economy, the higher and the more complex the taxes are the harder the brakes are applied. The twin sources of friction to an economy are regulations and taxes. Raise the friction high enough and the economy grinds to a halt. Add to that the misallocation of capital, and it is a miracle our economy is functioning at all, even with the life support of ZIRP. Were Trump to cut back the Kudzu, or better yet spray them with Round Up, the economy could breathe again, and once it get’s it’s wind there is no telling how fast it can grow, given all the innovation waiting in the wings for just such an opportunity.
Times of trial can make a President great, a President could be the most wonderful statesman ever, and that can be understood by the serenity of his Presidency, economic, social and cultural, but repairing the calamities brought about by a fool, and especially a string of fools, is the stuff of greatness. Trump is at that crossroad in history where he can be great, changing the direction, or he can be another fool who continues on the path to destruction. Chipping away at the edges won’t change the direction, more borrowing and spending, on infrastructure or anything else will not change the direction, only bold change, cutting government spending, lowering the debt, cutting taxes, cutting regulations, eliminating whole agencies of government, normalizing interest rates and stopping the cronyism, only that will change the direction, and steer us away from the cliff. Keep driving at the cliff, no matter how slow we go, we will eventually go over it, turn away and we need not.
Sincerely,
John Pepin
