The Economics of the Free Ride
THE ECONOMICS OF THE FREE RIDE
There is no such thing as a free lunch or a free ride.
Somebody must pay. The supreme goal of politics is to manage the
flow of information so that those who pay do not complain.
Successful politics is like a mosquito's bite: the victim itches
only after his blood is gone, along with the mosquito.
In George Orwell's novel, 1984, Winston Smith worked in
the Records Department of the Ministry of Truth. His job was to
drop printed records of politically incorrect facts down the
memory hole. The memory hole destroyed public traces of the now-
inconvenient record of the past, thereby rectifying the past.
His life's work was based on this principle: "Who controls the
past controls the future. Who controls the present controls the
past." Orwell (aka Eric Blair) did not foresee the World Wide
Web, but he clearly understood the pre-Web media.
The mainstream media can no longer easily deep-six the
records of the past. The Web is too decentralized for that.
Digital transmission is too inexpensive and too rapid. The
mainstream media are losing market share.
The media do retain half of their older function: to ignore
most of the present. The media decide what to report and, far
more important, what to highlight. What they do not highlight
can be concealed more effectively later on than concealing what
did get widely reported.
The masters of the mainstream media understand that people
have limited time. Time is not a free resource. It is the only
irreplaceable resource. Control over how one's time is spent is
the essence of responsible living. The mainstream media have
long been skilled masters of capturing people's attention. Only
in recent years have they lost this ability, due to new pricing
conditions: the Web. The media cannot effectively compete with
nearly free transmission of digits.
AS WE WENT MARCHING
The media whooped it up for the war in Afghanistan in 2001.
They whooped it up for the war in Iraq in 2003, even though this
war was obviously going to drain funds and troops from
Afghanistan. Then the media decided not to cover the war in
Afghanistan, because bin Laden had escaped. The Taliban went
underground. There were few skirmishes. The media's #1 rule
came into play: "If it doesn't bleed, it doesn't lead." The
public forgot about the war in Afghanistan, as did the media.
As the public steadily turned against the war in Iraq,
because of its high cost and low payoff -- a simple cost-benefit
analysis -- the media, except for Fox News, followed suit. They
issued an occasional mea culpa for their refusal to present both
sides of the story in 2003 on the wisdom of going to war in Iraq.
But they remained silent about the war in Afghanistan. They
Newspaper readers and network news viewers -- two endangered
species -- seem unwilling to spend time thinking about more than
one foreign crisis. The media understand this. So, they focus
on only one foreign crisis at a time. Everything else is
relegated to the back pages of the newspapers and to MSNBC.
If you were to take seriously the headlines -- and why
should you? -- you would imagine that Somali pirates are the
major threat to America and Western civilization generally.
There is little prime-time, front-page news coming out of
The war in Afghanistan is being fought in the memory hole.
So is the war in Iraq. (Remember the war in Iraq?)
FREE RIDE #1: THE WARS
These two wars are costing . . . what? Lives. Deaths are
no longer reported. Money. There are few reports on this.
There never were. Given the gargantuan size of the Federal
budget -- $3.6 trillion in 2010 -- the financial cost of war is
not much of an issue. If the entire Defense Department budget
were eliminated, the United States government would still run a
deficit of well over a trillion dollars in fiscal 2009. Defense
absorbs about half a trillion dollars a year, not counting
Because the media do not feature the costs of war in their
reports, the public has only human interest stories as the
grounds of assessment. These stories are no longer forthcoming.
This is ideal for the military. This guarantees an unchallenged
supply of funding. Red ink is irrelevant today. Red blood is
not being featured.
President Obama promised in March 2008 that he would end the
war in Iraq.
So when I am Commander-in-Chief, I will set a new goal
on Day One: I will end this war. Not because politics
compels it. Not because our troops cannot bear the
burden -- as heavy as it is. But because it is the
right thing to do for our national security, and it
will ultimately make us safer.
In order to end this war responsibly, I will
immediately begin to remove our troops from Iraq. We
can responsibly remove 1 to 2 combat brigades each
month. If we start with the number of brigades we have
in Iraq today, we can remove all of them 16 months.
After this redeployment, we will leave enough troops in
Iraq to guard our embassy and diplomats, and a counter-
terrorism force to strike al Qaeda if it forms a base
that the Iraqis cannot destroy. What I propose is not
-- and never has been -- a precipitous drawdown. It is
instead a detailed and prudent plan that will end a war
nearly seven years after it started.
This fact has gone down the media's memory hole.
He did not run on a promise to shift the war to Afghanistan,
yet that is what he is doing. The media remain silent. As far
as I can determine, Fox News favors war anywhere, any time, so it
remains silent. The liberal media favor war whenever it can be
fought without a risk of a humiliating loss. But, having backed
Obama, these outlets remain silent.
FREE RIDE #2: THE ECONOMY
He can focus on the economy, which is what matters most to
voters. He can propose new government programs, promise new
benefits, and guarantee stiffer regulation in the future, knowing
that the media, which are owned and operated mainly by liberal
Democrats, will give him a free ride.
Economists are also giving him a free ride. This recession
has revealed that the vast majority of economists never did
abandon Keynesianism. They believe that government spending is
the source of economic recovery. They still believe that
government deficits don't matter.
The amazing fact is this: the better Keynesians know it's a
religion based on hope and weak evidence. Probably the clearest
admission of this came from Benn Steil, the economist who serves
as a Senior Fellow and Director of International Economics for
the Council on Foreign Relations. He wrote this in London's
"Financial Times." It appears on the CFR's site.
And indeed, we as a profession are making our voices
heard in a way we never get the chance to do when the
credit is flowing, businesses are investing and
consumers buying what business wants to sell. Then, we
make arguments based on data, otherwise known as
"facts", processed through regression analysis and
logical rigour, which few humans read. (I know, I am an
economics journal editor.) Now, on the other hand, we
call for trillion dollar stimulus plans on the basis of
little more than citing John Maynard Keynes -- and
politicians revere us. Citing Keynes gives us special
licence to talk economics without using any. To
paraphrase the lawyers' dictum, when the facts are on
our side, we pound the facts; when theory is on our
side, we pound theory; and when neither the facts nor
theory are on our side, we pound Keynes -- and to great
Meanwhile, Chicago School economists have abandoned their
public commitment to Milton Friedman's call for a steady 3% to 5%
annual increase in the money supply. He believed that the
Federal Reserve could not successfully promote long-term economic
growth by lowering short-term interest rates by increasing the
monetary base. His methodological heirs remain prudently silent
in the face of an increase in the FED's adjusted monetary base of
over 90%, March 2008 to March 2009.
Keynes, not coincidentally, had nothing to say about
the proper components of fiscal stimulus. This allows
him to be cited with great effect by both paternal
progressives (who favour government spending) and
caring conservatives (who favour middle-class tax
Only the Austrian School economists write continually about
the monumental transformation in the economy that has taken place
since last September. The West has moved from the soft-core
Keynesianism of the English-language edition of Keynes' "General
Theory of Employment, Interest, and Money" (1936) to the hard-
core Keynesianism of Keynes' Foreword to the German edition, the
economy of "the total state." But there are so few Austrian
School economists that people in places of influence agree:
Austrians can be safely ignored.
Obama's free ride here is going to continue. The well-
organized corporate interests that supply each President with his
advisors want the taxpayer-funded subsidies. Goldman Sachs
provided Clinton's Secretary of the Treasury (Rubin) and Bush's
(Paulson). Kissinger & Associates gave Timothy Geithner his
first job. He rose to become the second most powerful official
in central banking: president of the Federal Reserve Bank of New
York. Nobody notices. Nobody complains. I mean nobody
FEDERAL DEFICITS FOREVER
Politicians fear a taxpayer revolt. Such a revolt is
unlikely until investors cease buying Treasury debt. For as long
as the government can run deficits at low interest rates, that is
how long they will continue.
The last months of Bush's Administration ended any serious
claim that Republicans favor a balanced budget. The bailouts
were nonpartisan. The voters knew it was a rip-off and
complained loudly. This did no good.
The first three months of Obama's Administration have
produced deficits on a scale never seen in peacetime American
history. The estimated $1.8 trillion deficit for fiscal 2008
will be exceeded if the economy continues to decline, which is
virtually certain. Tax revenues will fall as corporate profits
fall and payrolls fall.
Meanwhile, in January and February, foreign investors
started selling Treasury debt -- almost a quarter of a trillion
dollars' worth, net. This Treasury deficit will have to be
covered by other buyers. It is likely that foreigners will sell
another half a trillion dollars' worth this year, and this could
Faith is declining in the Treasury's ability to repay in
dollars of constant purchasing power. This will lead to higher
Treasury interest rates unless: (1) the Federal Reserve buys most
of this added debt by creating new money, or (2) the economy gets
so bad that investors sell shares and corporate bonds and buy
Treasurys, or (3) both.
Any cogent hope in a balanced Federal budget is gone. Only
the terminally naive will believe that either political party
will have the will to balance the budget once it is in power.
The likelihood of $2 trillion deficits over the next few years is
high. Even in an inflation-funded recovery, the deficit will
stay above $1 trillion a year.
This will not faze voters until price inflation drives up
non-Treasury interest rates. Mortgage rates will rise. That
will put downward pressure on real estate, despite price
inflation. Fewer buyers will be able to buy homes. If the FED
supports the mortgage market by funding Fannie Mae and Freddie
Mac bonds, as it is now doing, home prices will rise, but bond
rates will rise and therefore bond prices will fall. The present
value of all long-term credit will fall, especially annuities,
whole life insurance policies, and Social Security payments,
whose cost of living increases will lag behind the actual
increase in consumer prices.
When it becomes clear to the majority of those voters who
actually vote that the deficits will not revert to pre-2009
levels, there will be a rush to get into debt. People will see
that the dollar is falling in value. They will not understand
that the Federal Reserve's purchase of Treasury debt and toxic
financial assets is the cause of the dollar's decline. They will
understand only that prices are rising along with debt. They
will be lured back into the credit markets. "Buy now and pay off
with depreciated money."
Why will anyone lend? Because of rising interest rates.
Creditors will hope against hope that the Federal Reserve will
come to its senses and stop inflating. Bernanke twice this month
has promised that the FED will reverse its present policy of
expanding the monetary base (balance sheet). He has said that
the FED has ways of doing this when the recovery appears. But he
has not said which assets it will sell, or to whom, or on what
We are beyond the point of no return. The markets do not
acknowledge this yet because investors care mainly for the short
run. They do not count the cost of being a taxpayer and a holder
of dollar-denominated wealth. They care about the next quarter.
They believe in the greater-fool theory, that there will be
someone to buy their assets at higher prices. They used to
believe this about real estate. They still believe it about
stocks, bonds, and retirement promises.
Most investors are Keynesians, as are most politicians,
economists, and historians. They believe that digits are
capital, and that the government can redirect digits to multiply
capital. Keynes explicitly taught this: the multiplier effect.
It was nonsense in 1936, and it is nonsense today. But Keynes
was right about one thing in 1936. In the closing pages of "The
General Theory," he wrote this.
The ideas of economists and political philosophers,
both when they are right and when they are wrong, are
more powerful than is commonly understood. Indeed the
world is ruled by little else. Practical men, who
believe themselves to be quite exempt from any
intellectual influence, are usually the slaves of some
I can think of no better way to describe investors,
economists, voters, and politicians today than to cite Benn Steil
But hope is precisely the platform on which President
Barack Obama ran during his campaign. Hope has enabled
the president to raise the estimate for the number of
jobs his stimulus plan will create from 2.5m to 3m and
then to 4m in the space of just a few short speeches.
It is the ultimate faith-based initiative. And in the
spirit of unity he promised to bring to Washington, his
proposal comprised 60 per cent new spending and 40 per
cent tax cuts, the same proportion as that of Democrats
to Republicans in Congress. Yes, we can!
Economic reality will triumph over hope. The monetary base
will triumph over hope in stable prices. Federal deficits will
triumph over hope in Social Security and Medicare.
You have put your money where your hope is. If your hope is
in salvation by deficits and salvation by the Federal Reserve's
balance sheet, then you are a person of enormous hope.
If your faith is in the law of scarcity -- "There ain't no
such thing as a free lunch" -- then your hope had better be in
the voluntary society, which rewards productivity and service to
final buyers: consumers and savers. Given what has happened to
voluntarism since last September, that is a long-term hope.
Keynes wrote that in the long run, we are all dead. He
missed the point: in the long run, some people will inherit,
while others will not. Inheritance is based on degrees of
conformity to the truth. Keynes had no biological heirs. His
intellectual heirs are now making their last stand. I have said
this before. (http://LewRockwell.com/north/north660.html) I
will say it again. I promise.
There are no free rides in this life. The public
transportation system economy, which offers free rides, is headed
toward a trestle that has collapsed. The engine got halfway
across the trestle and disappeared last October: investment
banking. The rest of the train is still moving forward at an
I suggest that you jump.
April 17, 2009