Schiff w/ Knight: Why Does the Economy Crash?

Peter recently appeared on the Don’t Tread on Anyone podcast hosted by Keith Knight, a heavy hitter in the libertarian space. Keith and Peter discuss one of Peter’s books, How an Economy Grows and Why It Crashes. Their conversation covers the pillars of Austrian Business Cycle Theory, the ethics of regulation, and a whole host of disastrous government interventions, ranging from the Jones Act to subsidized college education.

Peter starts the interview with a high-level summary of his book. The market, not the state, provides the incentives necessary for the allocation of scarce resources:

The best way to maximize the value of scarce resources is through a competitive free market, where you have the profit motive and competition that guide the allocation of resources. But when you have governments in the way … where you have just a group of people who are trying to make these decisions as to where resources and land, labor, and capital should be allocated, you don’t have anywhere near the type of efficiencies that you get in a free market.

One example of government meddling accomplishing the opposite of its goal is federal student loans. Rather than decrease the financial burden of college, such loans have only made it more expensive for everyone:

The colleges were like, ‘These kids can get all this government money to go to school. Let’s raise our prices because they don’t care. They’re just borrowing the money from the government.’ And they start really spending more money to try to advertise. … And they kept raising their prices. And then the government keeps raising the subsidy and the loan guarantees. And the prices just started to explode.

The most egregious case of government intervention is with the banking system. By altering the interest rate, the Fed distorts society’s time preference and warps investments and savings:

One of the important prices in a market economy is an interest rate. Interest rates are a very important price, and they should be determined by supply and demand, like every other price. … What happens is the government comes in and says, oh, we’re going to artificially lower interest rates. We’re going to take interest rates and suppress them. … The markets behave inefficiently because investments are funded that really shouldn’t be funded because people’s time preferences are not reflected in those low interest rates.

With the money printers at the ready, the government coinpurse can balloon to unsustainable proportions, and inflation is the easiest way to pay for it:

Whatever the deficit is, we still have to pay for that. So the government has to borrow the money and take it out of the capital markets where it can no longer fund private sector investment, or the Fed does it. And they print the money, and prices just go up. So either prices go up, interest rates go up, but there’s no free lunch. We have to pay for all the government we get one way or another. And the worst way to pay for it is with inflation. But politically, that’s the most expedient.

Keith brings up the challenge MMT, or Modern Monetary Theory, tries to raise against free-market economics. Peter points out that even proponents of MMT acknowledge it has its limits:

Even the MMT people say the problem with that is inflation. So they’ll say it’ll work until prices really start going up, and then the government has to withdraw the money. But yes, I mean, in theory, if you borrow in your own currency, you don’t have to default. So can the US government avoid defaulting on the debt? Yes, we can inflate instead of default. But then instead of telling our creditors, ‘You’re not going to get your money back,’ we just tell them, ‘You’re going to get your money, but you’re not going to be able to buy anything with it.’

Peter and Keith close the show on the Jones Act, a 20th century regulation that severely restricts maritime shipping in the United States. Peter, a resident of Puerto Rico, knows firsthand how protectionist laws like this increase the cost of living for Americans:

The guys that benefit from the Jones Act, they know—they see these massive benefits and they’re willing to pay big bucks to the government to preserve that windfall. But all the consumers all over the country who maybe end up annually paying an extra $500 to $1,000 for everything they consume, they don’t even know. They have no idea how much money they’re losing.

If you missed it, check out Peter’s other recent interview with Todd Sachs!