Peter Schiff, the president of EuroPacific Capital and sometimes-pundit/author/political-candidate, testified before the House of Representatives Subcommittee on Government Reform and Stimulus Oversight on September 13th. The video of his testimony has become a minor YouTube hit and was featured prominently this week by Breitbart TV.
Schiff’s rat-a-tat-tat criticisms of government intervention and promotion of common sense economics, right out of the Austrian School, is music to the ears of conservative-libertarian types. He was a one-man laissez faire quote machine, with lines like:
“One of the riskiest things you can do in America is hire someone.”
“Demand doesn’t come from things that aren’t produced.”
“Regulations substantially increase the cost of employing people.”
“Infrastructure spending drains the economy of resources.”
“You can always see . . . the jobs government creates. What you can’t see are the jobs they destroy.”
“All the government can do is rearrange the resources, it doesn’t create any wealth.”
“An economy has to be based in savings, investing, and production.”
Schiff centered his testimony around explaining, through one statistic and common sense pronouncement after another, why fiscal and monetary policy — specifically government stimulus and low interest rates — are dragging down the overall economy, destroying jobs, devaluing the currency, causing businesses to flee the country, and resulting in all sorts of unintended consequences.
He described how securities regulators damaged his own business, fining him $15K for hiring too many people and enforcing a hiring freeze while he incurred another $500K in legal fees fighting these decisions. He and others have no incentive to hire because the costs are too high.
Perhaps more remarkable than Schiff’s unique ability to put all this forth in a concise way that even a public high school graduate could understand was the lack of ability of his interlocutors to offer any sort of intelligent counterargument to refute Schiff’s logic. Those are the same people playing with trillions of other people’s money and forming policies with huge consequences for the entire world.
Dr. Heather Boushey, an economist at the Center for American Progress, represented the liberal and modern Keynesian view on the panel. She feebly tried to argue that stimulus does produce jobs and growth by using the example of building a bridge with public funds. That requires hiring engineers and contractors from the private and public sectors, she said, and they in turn have to buy concrete and all sorts of other things, largely from the private sector economy. This multiplier effect, in her view, grows the economy and creates jobs.
The House committee included Rep. Elijah Cummings (D. Maryland), who tried his best to serve as a shill for Obama and defend all things Stimulus. He couldn’t understand why China was busy building 100 airports, while here we were haggling over a few more hundred billion for our own infrastructure projects, which, in his mind, could only help the economy.
As Schiff argued, China is currently rich and has money to spend on these projects. Meanwhile the U.S. has a $15 trillion debt, and these infrastructure projects only drain the economy of resources before they realize any return on the investment, if ever. The bottom line: all that money has to come from somewhere.
Those who make a career out of spending other people’s money are married to the idea that any spending is good. It’s stimulating. It’s the multiplier effect. Circulation. If we just keep feeding more dollars into the pump, eventually that wealth will just keep spreading itself around, and those very same people will be there to make sure it gets directed to all the right places. In his testimony, Schiff completely dismantled this argument piece by piece, as he explained as a successful business owner, why he hires people, why people work for him, how regulations and taxation harm him and therefore his business and potential employees.
“People work for me because I have capital; I have tools that employees lack,” he stated. In short, he gave an argument, backed up with empirical evidence. His intellectual (if we’re being generous) counterparts offered no such argument or counterargument. Theirs boiled down to “taxing and spending = good”.
Like all Leftists, Elijah Cummings broke out the violin and began a line of questioning about educating our children. His rebuttal: “We have got to invest in our people. One of the greatest threats to our national security is the failure to properly educate every single one of our children . . . we have to spend now to educate our children so they can take over this world . . . if we’re not careful, we will implode from the inside.”
Despite Rep. Cummings’ use of a 1980s Whitney Houston pop song as an economic argument, Schiff entertained it with a retort about how we’re spending, not educating, and student loans are inflating the cost of education and sticking graduates with a mortgage they can’t afford. “I’m saddened by those comments,” replied Cummings. He offered no refutation of Schiff’s claim, perhaps because, well, children are the future, and that’s all that needs to be said.
Perhaps Schiff’s strongest argument was that the U.S. government continues doing the exact opposite of what it should be doing. The government should be encouraging industry by getting out of the way, allowing the recession to run its course. The banks are only going to fail again because they’re insolvent and being propped up by the Fed, and the only way to solve the problem is to let interest rates go up. In short, we – all of us – need to stop spending. Instead, we need to save and invest, because that’s where capital comes from. If we invest in capital, then we’ll use it to produce things that are useful, as well as export it.
This simple argument contains many threads of logic that are anathema to those who spend other people’s money. Looked at from an individual level, which would be better for your personal finances: taking your paycheck (or better yet, your unemployment check) and spending it on $14 drinks for you and all your friends every night of the week; or putting it in the bank and then later using the savings to buy a new computer or new clothes that could be useful to your job, or saving up to buy a house that will appreciate in value over time? Those drinks may have been fun for a few hours, but the only thing stimulated was the bar and the liquor companies and their suppliers, and possibly some fleeting conversation. Otherwise, that’s money you’ll never see again.
We can look to the not-too-distant past for an example on a much grander scale. Traditionally, Leftists have argued FDR’s New Deal spending policies eventually got the country out of the Depression, and cite this as Exhibit A when it comes to bigger government and more spending.
For years, many on the Right have argued the New Deal only prolonged the Depression, and that it was WWII that got the economy moving again. To the New Dealers, the government rightfully pulled money out of the private sector and used it to employ people to do government-created jobs and tasks, the utility of which was secondary to providing more people with a paycheck. Opponents claim the costs of taking money out of the economy to pay people for doing things that had little overall value had a net negative effect on the economy, and hence prolonged and deepened the Depression.
By arguing that WWII ended this cycle, it must be claimed the production of ships, planes, bullets, guns, etc. created a level of usefulness beyond providing men and women with a job and a paycheck. True, there are obvious economic benefits to preventing the entire world from falling under genocidal tyranny. But beyond that, it’s hard to argue production of weapons will grow a domestic economy once hostilities end, unless all those factories and labor (capital) get converted into useful, non-military production.
This argument makes some sense, but a stronger case can be made that the war led to a greater level of savings amongst individuals. During and after the war, people saved their money, and within several years were using their savings to buy homes, automobiles, and new refrigerators. These were useful items, and they improved the lives of consumers, who in turn grew these industries with their purchases.
Meanwhile, social spending by the federal government was only at 30 percent whereas today 70 percent of the federal budget is spent on social spending (as Victor Davis Hanson noted in a recent column), and the vast majority of our energy supplies were produced domestically. The 1950s and 60s was a period of economic expansion resulting from savings, investment, and production largely left alone by the government.
This savings, investment, and production are what Schiff rightfully argues is needed and necessary. Let banks and car companies fail. Let the profitable businesses compete for workers. Remove government barriers like burdensome regulations, high taxes, and the minimum wage. Secondly, get the Fed out of the fiscal policy business so it can stop devaluing the currency, and let interest rates increase to encourage more savings and therefore more capital investment.
The people who make policy don’t seem to understand this argument, or they intentionally avoid addressing it because it requires a big detour around them, and therefore their power. They certainly didn’t offer a substantive counterargument to Schiff, and in the last week alone we’ve seen a president declare he’ll raise taxes on those who already pay for everything and create industry and jobs; a Fed that will try another round of quantitative easing through an old trick called “The Twist” (an attempt at further lowering long-term interest rates); and Barney Frank attempt to further politicize the Fed and therefore monetary policy by restructuring the way the 12 regional bank presidents are allotted their positions, basically turning them into political appointees, further politicizing an institution conceived as far removed from political pressures.
Republican presidential candidates would be wise to watch the video of Schiff’s Congressional testimony. They could help put an end to the idea that government simply needs to pick the right winners and losers, and more importantly that more money is what this country needs. Stimulus is great for those who get to play with other people’s money, earned through hard work, creativity, efficiency, ingenuity, and innovativeness. It’s easy to sit on a committee and take wealth from the places that produce the most of it and pass it out to your cronies or dependent constituents, and then threaten to cut the services people rely on most, like police and fire departments, as soon as someone suggests cutting the size of government. It takes more courage to say: “It’s your money, now go put it to work, however you see fit.”
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