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NY Times: Ron Paul was right

December 14, 2010 3 comments

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Monday’s issue of the New York Times featured a rather remarkable article titled Rep. Ron Paul, G.O.P. Loner, Comes In From Cold. An improbable divergence from the Times’ history of mostly (though not completely) ignoring the world’s most prominent living libertarian, this article serves to illustrate the increasingly mainstream nature of Dr. Paul’s anti-government philosophy. Yet it is even more than that. The article does not simply observe and comment on Dr. Paul’s stance; it admits that many other mainstream figures who once criticized and mocked him now feel they should have listened to him all along. As former New Mexico governor and now 2012 presidential candidate Gary Johnson has observed, the news media feel they missed out on the movement in 2008, and they wish they had been on board. I wish to analyze and respond to the Times’ piece, item by item, in its entirety.

Rep. Ron Paul, G.O.P. Loner, Comes In From Cold

WASHINGTON — As virtually all of Washington was declaring WikiLeaks’s disclosures of secret diplomatic cables an act of treason, Representative Ron Paul was applauding the organization for exposing the United States’ “delusional foreign policy.”

For this, the conservative blog RedState dubbed him “Al Qaeda’s favorite member of Congress.”

A video of Dr. Paul speaking confirms this is true – and important. I’m glad the article opens with a strong statement relevant to current events. The dust hasn’t settled yet on the Cablegate controversy, but as of this writing, The Journal’s public opinion poll shows 89% of responders calling Wikileaks founder Julian Assange a “hero” as opposed to just 11% who regard him as a “villain.” This contrasts starkly with the views of the political establishment, who almost unanimously seek to silence or assassinate Assange.

There’s no sense in being timid about this. Dr. Paul believes wholeheartedly that the federal government is an excessively secretive and destructive organization which lies and deceives in order to achieve devious goals, especially regarding the occupation of foreign countries. He supports (and I support) anyone who, by peaceful means, attempts to expose the government’s deception to the public, and that includes Wikileaks. If anyone out there disagrees, he or she may as well stop reading and move on to another article.

It was hardly the first time that Mr. Paul had marched to his own beat. During his campaign for the Republican presidential nomination in 2008, he was best remembered for declaring in a debate that the 9/11 attacks were the Muslim world’s response to American military intervention around the globe. A fellow candidate, former Mayor Rudolph W. Giuliani of New York, interrupted and demanded that he take back the words — a request that Mr. Paul refused.

Once again video confirms that this debate occurred. What the Times fails to clarify here is that a myth sprung up surrounding this particular debate – namely, that Dr. Paul claimed the United States “invited” a terrorist attack – which is a pure fabrication. His true stance is much more matter-of-fact. He simply believes that blowback is a predictable consequence of an interventionist foreign policy, rightly or wrongly. Dr. Paul does not claim – and no libertarian claims – that the 9/11 attacks were morally justified or that Osama bin Laden should continue his vendetta against the American people. Rather, the non-interventionist philosophy holds simply that such attacks will occur as a result of United States meddling, regardless of whether they should, and as such policy-makers need to adjust their strategy from intervention to peace in order to keep the American people safe.

During his 20 years in Congress, Mr. Paul has staked out the lonely end of 434-to-1 votes against legislation that he considers unconstitutional, even on issues as ceremonial as granting Mother Teresa a Congressional Gold Medal. His colleagues have dubbed him “Dr. No,” but his wife will insist that they have the spelling wrong: he is really Dr. Know.

Correct again. A more interesting example in recent memory would be when Ron Paul cast the only “No” vote against granting subpoena power to an executive commission designed to investigate the Deepwater Horizon (BP) oil spill. Public opinion on Dr. Paul’s decision was low, but he cited the absence of any clause in the Constitution authorizing such a subpoena, explained that there were already other procedures in place for cleaning up oil spills which did not involve the shifting of power from the legislature to the executive branch, and lambasted the federal government for dealing with the oil spill inefficiently and using unprecedented executive authority.

Now it appears others are beginning to credit him with some wisdom — or at least acknowledging his passionate following.

After years of blocking him from a leadership position, Mr. Paul’s fellow Republicans have named him chairman of the House subcommittee on domestic monetary policy, which oversees the Federal Reserve as well as the currency and the valuation of the dollar.

I want to thank the author of this article, Kate Zernike, for going out on a limb here. I have heard from many fairly trustworthy people that the last time Ron Paul was in line to chair this subcommittee, the GOP simply abolished the subcommittee entirely rather than permit him to speak out. However, I can’t for the life of me find any primary source confirmation dated to the time this allegedly happened, 2008 or earlier. Everyone agrees that Ms. Zernike is right, but I can’t prove it. If you have a source for this information, please share.

Mr. Paul has strong views on those issues. He has written a book called “End the Fed”; he embraces Austrian economic thought, which holds that the government has no role in regulating the economy; and he advocates a return to the gold standard.

This is not true at all. I guess I shouldn’t be surprised, but I continuously am, at how even reporters who seem to care about their subject and do research can remain agonizingly ignorant of very simple economic issues. It’s par for the course for the NY Times to fail to be clear about how economics actually work, but to make an outright false statement … well, that’s par for the course, too.

Dr. Paul emphatically does not advocate the gold standard. He advocates for freely issued hard-asset currency in the long-term and legalized competing currencies in the short-term. Neither of these two things is the gold standard. Ron Paul firmly believes that no one should be forced to accept a currency which he or she does not value, whether that currency is a Federal Reserve note or a gold coin or anything else.

Furthermore, Austrian economics is not a political ideology, nor any opinion of any other form. Austrian economics is an objective method of studying economic phenomena. It makes no value judgments about what people should or shouldn’t do. A great economics professor, author, and personal friend of mine, Dr. Steven Horwitz, wrote at length to explain what Austrian economics is and what it is not, in case any reporters from the NY Times want to educate themselves.

Nevertheless, the real gem of this article consists of the subsequent several paragraphs:

Many of the new Republicans in the next Congress campaigned on precisely the issues that Mr. Paul has been talking about for 40 years: forbidding Congress from any action not explicitly authorized in the Constitution, eliminating entire federal departments as unconstitutional and checking the power of the Fed.

He has been called the “intellectual godfather of the Tea Party,” but he also is the real father of the Tea Party movement’s most high-profile winner, Senator-elect Rand Paul of Kentucky. (The two will be roommates in Ron Paul’s Virginia condominium. “I told him as long as he didn’t expect me to cook,” the elder Mr. Paul said. “I’m not going to take care of him the way his mother did.”)

Republicans had blocked Mr. Paul from leading the monetary policy panel once before, and banking executives reportedly urged them to do so again. But Republicans on Capitol Hill increasingly recognize that Mr. Paul has a following — among his supporters from 2008 and within the Tea Party, which helped the Republicans recapture the House majority by picking up Mr. Paul’s longstanding and highly vocal opposition to the federal debt.

Aides, supporters and television interviewers now use words like “vindicated” to describe him — a term Mr. Paul, a 75-year-old obstetrician with the manner of a country doctor, brushes off.

“I don’t think it’s very personal,” he said in an interview in his office on the Hill, where he has represented the 14th District of Texas on and off since 1976. “People are really worried about what’s happening, so they’re searching, and I think they see that we’ve been offering answers.”

If there is vindication here, Mr. Paul says, it is for Austrian economic theory — an anti-Keynesian model that many mainstream economists consider radical and dismiss as magical thinking.

This quality of journalism coming out of the NY Times is nearly unheard of. Rarely if ever have reporters been willing to take up this stance with such clarity: The establishment said one thing. The libertarians said the opposite. Time passed, and more and more people are thinking the libertarians were right. That’s just not an easy thing to admit to.

Even framing the debate that way is rare. Typically mainstream papers do their absolute best to portray every issue as a conflict between one vague tyranny and some other vague tyranny. When the NY Times summons the will to talk about monetary theory, it almost invariably discusses the arguments for government-created inflation versus government-created deflation. The idea of monetary choice is never mentioned, either because the mainstream reporters don’t want us to know about it, or because they sincerely can’t even imagine it.

But that is changing – fast – and this article proves it. I wonder how many people read the NY Times on Monday and then Googled Keynesian or Austrian economics. I wonder how many of them managed to find the rap video which explains the difference between Keynesian and Austrian views on the causes of and cures for the Great Recession.

Freedom comes when libertarians take control of the dialogue of the day and define the terminology to be used in discussion. As long as people are taught to think in terms of what kind of lifestyle will be forced upon them, progress cannot be made. But when ideas like those of the Austrian economists and others who identified the nature and significance of individual choice start to enter the discussion, the genie is let out of the bottle. A human being, once taught that he is capable of making decisions different from those of others around him without entering into violent conflict with them, cannot be de-educated, and cannot be silenced.

It is unnecessary for me to continue to pick a part the minutiae of this article with commentary. You can see the significance. Now read the remainder of it, observing the terms which I have chosen to emphasize. You will find that they have certain key characteristics. Namely, they are specific, which is to say, they refer to a definable idea or object which can be qualified and observed, they are relevant to serious issues that face America today, and they are oriented around a discussion of choice, meaning that they either are associated with advocates for violent intervention in the lives of peaceful people or associated with advocates for peace and freedom. By helping to shift the dialogue of our day to center around these words, the NY Times has (perhaps inadvertently) made a substantive contribution to the libertarian movement.

The theory argues that markets operate properly only when they are unfettered by government regulation and intervention. It holds that the government should not have a central bank or dictate economic or monetary policy. Once the government begins any economic planning, such thinking goes, it ends up making all the economic decisions for its citizens, essentially enslaving them.

The walls of Mr. Paul’s Congressional office are devoid of the usual pictures with presidents and other dignitaries. Instead, there are portraits of Ludwig von Mises and Murray Rothbard, titans of the Austrian school. For years, Mr. Paul would talk about their ideas and eyes would glaze over. But during his presidential campaign, he said he began to notice a glimmer of recognition among those who attended his events, particularly on college campuses.

Mr. Paul now views his exchange with Mr. Giuliani in 2008 as a crucial moment in his drive for more supporters. “A lot of them said, ‘I’d never heard of you, and I liked what you said and I went and checked your voting record and you’d actually voted that way,’ ” he said. “They’d see that the thing that everybody on the House floor considered a liability for 20 years, my single ‘no’ votes, they’d say, ‘He did that himself; he really must believe this.’ ”

His campaign that year attracted a coalition that even he recognizes does not always stand together: young people who liked his advocacy of greater civil liberties and the decriminalization of marijuana; conservatives who nodded at his antidebt message; and others who agreed with his opposition to the Iraq war.

During George W. Bush’s presidency, he was out of favor with the reigning neoconservatives who were alarmed at his anti-interventionism. He still gives many conservatives fits with comments like his praise for WikiLeaks.

And many of those who follow the Fed closely say his ideas are “very strange indeed,” in the words of Lyle E. Gramley, a former governor of the Fed who is now a senior economic adviser at the Potomac Research Group. “I don’t think he understands what central banking is all about,” Mr. Gramley said.

Putting such a critic of the Federal Reserve chairman, Ben S. Bernanke, in such a prominent role, he added, could damage economic confidence. [Editor’s note: Business is driven by the animal spirits!]

The public doesn’t understand how serious the problem was and why the Fed had to take the action it did,” Mr. Gramley said. “Having someone in Congress taking shots at the Fed makes the situation uneasy.”

Still, Mr. Paul says, his colleagues respect his following outside Washington. “I was on the House floor today,” he said, “and somebody I don’t know real well, another Republican, he was talking to two other members, and he knew I was listening. He pointed at me and said, ‘That guy has more bumper stickers in my district than I do!’ ”

Interview requests are so common that Mr. Paul has set up a camera and studio backdrop in his district office to save him the hour’s drive to television stations in Houston.

His bill demanding a full audit of the Fed, which he had unsuccessfully pushed for years, attracted 320 co-sponsors in the House this year.

And the lunches that he has held in his office every Thursday, where lawmakers can meet intellectuals and policymakers who embrace Austrian economics, have become more crowded, drawing Tea Party celebrities like Congresswoman Michele Bachmann of Minnesota.

“For a long time, a lot of people in Congress on both sides of the aisle agreed with Ron a lot of the time but felt it wasn’t safe to go there,” said Jesse Benton, a longtime Ron Paul aide who ran Rand Paul’s Senate campaign.

The father is about to gain even greater visibility. He says he will use his new chairmanship to renew his push for a full audit of the Fed and to hold a series of hearings on monetary policy.

On Web sites for Ron Paul fans, there are urgent pleas for a father-son (or son-father) “Paul/Paul 2012” ticket. But in an interview, the senior Mr. Paul seemed taken by surprise by the suggestion of teaming up. While he is bursting-proud of his son, he is not necessarily ready to yield the spotlight: He is pondering another presidential run on his own.

“I’d say it’s at least 50-50 that I’ll run again,” he said, adding that he would look at where the economy is. (Aides add that it would depend a lot on what his wife, Carol, says.)

But for all the ways the Tea Party echoes Mr. Paul on fiscal issues, it is not clear such support would carry over into a presidential campaign. The last time he ran, he won less than 2 percent of the vote, though that was before the Tea Party became a force in politics.

Even many Tea Party conservatives are not on board with Mr. Paul’s beliefs about scaling back the United States military worldwide. And Paul supporters look on the Tea Party with some disdain.

Mr. Paul acknowledged the sometimes competing interests among Tea Party supporters and his fans. “What brings them together is this acceptance that there’s something really wrong, that we’ve spent too much money and government’s too big,” he said.

That, he added, was why he had to work at keeping up his influence, particularly in spreading the word about the cost of foreign interventions.

Still, he noted: “We’re further along than I would have expected in getting our message out in front. I thought I’d be long gone from Congress before anybody would pay much attention.”


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The Collapse of the Brain Bubble – How the federal government will end college education.

May 24, 2010 11 comments

To listen to the audio version, play the video below. To read the transcript, simply scroll down.

Hello, internet. Today I’m here to talk to you about a serious threat to the stability of our economic system and our lifestyle in general. It is the “brain bubble”, a systemic miscalculation of how society’s resources should be allocated to education. To understand the severity of the threat posed by the brain bubble, we must first explore the basic misunderstandings of economics from which the whole problem stems.

The economy is simply the word economists use to describe the aggregate of all the things that people do with their capital. Capital is anything that exists through time and has value. Land and machines are good examples of capital. With capital, people can perform activities that produce valuable output. For example, with land and machines a company can maintain a manufacturing plant that produces stuffed animals or food products to sell.

The decision to allocate some capital, also called “resources”, to a particular economic activity is called “investment”. At any given time, there is only a certain amount of capital in the world, so society must be wise in how it invests. The world should not, for example, use half of all its factories to make stuffed elephants if only five percent of people actually want a stuffed elephant. The economy needs a system by which people can decide whether to invest their capital in a particular venture or not.

Fortunately, such a system exists in the form of interest rates. Money represents capital, in the sense that it can be traded for capital and vice-versa. Loans of money, therefore, are an investment by the lender in whatever the venture for which the loan is made. In a free market, interest rates on loans will tend to equal the average expected return value for investments in general. If a company borrows money to perform an activity, and that activity has a return that is greater than the interest rate, the company will pay off the loan and then expand. If instead the venture returns less than the over-all interest rate, the company will have to close its operations in order to repay the loan.

Suppose, for example, that I have imagined a better kind of soda than what is currently on the market. I think I can provide people with a beverage that tastes better than Coke or Pespi and costs less. An investor can make me a loan, with which I can build a factory and start marketing my product. If I’m right, and people want what I’m selling, then my sales will spread rapidly through the soda market, and I will turn a large profit. With that profit, I will pay back my lender plus interest, thus justifying his initial investment in me. If I am wrong, and my invention was not a good idea, then I will turn a small profit or none at all, I will be unable to make the interest payments on my loan, and my lender will not earn money on his investment. This discourages lenders from investing in products and services that people don’t want. This is the policy by which capital is invested in useful ventures.

Your actions are also business ventures. People can invest in you. They can do this, for example, by granting you a student loan so that you can go to college. If your activities after college prove highly productive, you will earn a large salary, and will pay off your student loan with interest. If instead you are lazy or dumb, or if you simply want to pursue a lifestyle that does not involve a lot of economic activity, your lender will lose money on you. This, of course, creates an incentive for lenders to try to determine the expected productive output of students while they are in college. Students who are likely to pursue high-end careers that require a lot of education will tend to get larger loans, while students who will not apply a degree in a productive fashion will be offered smaller loans or no loans at all.

At least, all of that would be true if interest rates were unregulated, student loans came from private investors with individual responsibility for the success or failure of the loans, and college education had a definable cost to each individual who received it. Instead, investors have been required to issue student loans through federal programs, at federally-approved interest rates, for the past several decades. The cost of college education has been increasingly subsidized and controlled by both federal and state governments. More recently, President Obama nationalized the entire student loan program, with the reasoning that attempts by lenders to profit from their investments were interfering with students’ opportunities for education.

The result of all this is that the discriminating factor in investing – the need for investors to profit on their investments – has been totally removed from the equation of who gets a student loan and how much they get. Student loans are no more or less likely to go to students that will actually make use of them and be able to pay them back than to students who have no future in higher education and have no ability to repay their loans at all. That would be fine if society had an infinite amount of educational resources to allocate to whomever the government pleased. However, resources are finite, and every dollar that is spent educating someone who will not work to pay back his loans is a dollar that could have been spent educating a more productive citizen or building a factory to produce food to end world hunger.

The progressives will tell you that investment in education almost always has a positive economic return. That is emphatically not true. Hundreds of thousands of students with federal loans cannot pay them back, and the problem is so widespread that Obama already has plans to “bail out” the student loans and nullify the debt. Even if it were true that education always produces positive returns on investments, that is still a construct of a government-regulated, artificially low interest rate which ignores the opportunity costs associated with investment. By forcing interest rates to be lower than the free market would naturally make them, the federal government has made it profitable to invest in students whose activities after graduation do not economically justify the initial investment.

By removing the need to allocate resources to education in precisely so far as it is efficient to do so and no farther, the federal government has created a brain bubble. Loads of people are going to college, no matter how much it costs, and no matter whether they actually care about their degree or have any plans to enter a specialized career after graduation. Students who don’t need a college degree can get federal loans, and, if they don’t ever make enough money to justify those loans, they will be absolved of all debt under Obama’s new plan.

The cost of college has soared exponentially above the rate of inflation over the past several decades. Every time book prices, tuition, and boarding costs go up, the federal government has responded by subsidizing higher education even more heavily, enforcing stricter regulation on lenders, and lowering interest rates. These policies are promoted as being necessary to allow people to continue to get a good education in spite of rising costs. The entire strategy has never worked, not even a little bit. At every turn the government has tried to curb rising costs by subsidizing even further, removing even more of the ever-dwindling incentive to allocate resources efficiently. Even as technology gets cheaper, books get easier to produce, dormitories become better-designed, and educational techniques get ever-more refined, the cost of higher education continues to balloon. In all of the government’s attempted analysis of this situation, the one question that is never asked is, “Why are costs going up?”

They are going up, plain and simple, because the interest-rate information, the driving need to supply education to those who will make use of it and not to others, has been destroyed. It has been destroyed by the very same policies that were meant to make education accessible to everyone. Costs will not go down because the government yells or the people protest. The only strategy that can mitigate the cost of college education is the cessation of all subsidies and the release of the government’s grip on interest rates. When lenders are allowed to seek profit in the loans they grant to students, colleges will again have an incentive to minimize tuition, and students will have an incentive to work hard in school to prove their academic worth.

However, it is clear that strategy will not be adopted in America barring massive political upheaval. Instead, through Obama’s recent decision to totally nationalize the student loan program and eliminate any remaining profits, college tuition costs have again spiked. Obama has set a precedent now that loans can be given to anyone for any reason. If the loan cannot ever be paid back, the government will bail out the lender. All incentive for fiscal responsibility and economic efficiency is gone.

The cost of college will continue to grow over the next ten to fifteen years. No later than 2030, the government will go completely bankrupt, and colleges will no longer be able to accept payment promises through Federal Reserve notes. When that happens, the brain bubble will burst. College will be so outlandishly expensive that no one will be able to afford it without federal assistance, and no federal assistance will be forthcoming. The well will run dry. When the government is no longer able to bail out society today with money it hopes will be created tomorrow, the college market itself will collapse. Dormitories will sit empty for years in much the same way that houses have been abandoned since the 2008 housing crisis. Just like all bubbles before it, the brain bubble is a result of systemic over-investment without regard for actual returns. It is guaranteed to burst, and the result will be an entire generation of Americans who will not have any of the skills of higher education.