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Keynesians Are Clueless

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Paul Krugman, New York Times columnist, Nobel Prize winner, and Keynesian economist extraordinaire is about to have his new book, titled End this Depression Now, released. In it, the Duke of Deficit Spending argues that a speedy, robust recovery from the Great Recession which started in 2008 is just a quick policy decision away. If only our leaders can muster the “intellectual clarity and political will” needed to raise federal spending further, Americans will begin consuming again, businesses hiring, and the current depression will be over in a flash. Once again Krugman is being true to his economic philosophy: increasing aggregate demand through loose fiscal and monetary policy is a cure-all for what’s ailing the economy. Let it be said that there is not a more consistent deflationist in all of the economic profession than Paul Krugman .

Now, why anybody would still listen to Krugman is a mystery to me. After all, he entirely missed calling the financial crisis of 2008, while Austrian economists were spot on with their prognostications. I suppose most laymen don’t know the difference and most economists and academics are as Milton Friedman proclaimed so long ago, “All Keynesians now.”  Thus ignorance of, and loyalty to, a failed philosophy are powerful forces to make people do irrational things.

In the first place, Krugman shows his ignorance with the title of his book, End this Depression Now. The statistics indicate that we are not currently in a depression. Secondly, current numbers indicate that the deflationary spiral that Krugman has been predicting and fears the most is not happening. On the contrary, while he continues to fret over falling prices leading to a double-dip recession, long-term trends point strongly toward oncoming double digit price inflation.

What it all boils down to is that Krugman and other Keynesian economists are about to miss the next economic crisis. Austrians have been arguing all along that we can’t solve our economic problems by doing the same things that got us into the mess in the first place. Deficit spending and a ridiculously loose monetary policy will not cleanse the market of all the mal-investments made during the preceding artificial boom (housing bubble).  They will only put us deeper into trouble. What is needed is a drastic cut in government spending, a cut in taxes, and the setting of interest rates by the market, not the monetary oligarchs at the Federal Reserve.

So because policy makers in Washington listened to Krugman and his ilk over the voices of reason, we are about to enter the next cycle of boom and bust. It will consist of phony growth, rising prices, and rising interest rates, which will ultimately pop the bubble and send the economy into another tailspin. The proof is in current trends.

In spite of Krugman’s ill-timed book, we are not in the middle of a depression. Consumer spending is way up. In the fourth quarter of last year balances on credit cards rose 9.27 percent. In February, retail sales in the U.S. improved in 11 of 13 industry categories and marked the biggest gain in five months, according to Commerce Department figures.

Then there is job growth. 400,000 private sector jobs have been created just in the first two months of this year. More workers mean more spenders and more spenders mean more jobs, right?

Oh, and let’s not forget how well the financial markets are doing. The Dow is up 7 percent YTD, the S&P 500 is up 11 percent YTD, the Homebuilders Index is up 23 percent YTD, and the S&P Financials are up 21 percent YTD. These are not numbers indicative of a depression.

But, all of this good news is coming at a cost, literally. We are approaching the place this commentator wrote about on October 16, 2009. Bernanke and the Federal Open Market Committee are going to have a big decision to make in the near future: raise rates and burst the Fed-induced bubble or leave rates low and watch prices skyrocket.

Price inflation is already heating up. It was only a matter of time before all the stimulus, low interest rates, and money printing kicked in to produce higher prices. The money supply has increased by 14.6 percent year over year ending in February. That makes 39 consecutive months of double digit year over year rates of monetary inflation.

The result has been higher gasoline and food prices. College and healthcare costs continue to rise. And for the fourth straight month, the Manufacturing ISM Report On Business® (5) shows the number of industries experiencing higher raw material costs on the rise and the number of industries experiencing lower raw material costs on the decline. It will be just a matter of time before those higher raw material costs find their way into higher prices on merchant shelves.

So while Krugman and other Keynesians clamor for more federal spending and easy money to produce a speedy, robust recovery from the Great Recession, they are missing that the next boom and bust cycle has already begun. But, that’s okay because Austrians have been predicting it for some time.

In the words of Yogi Berra, “It’s déjà vu all over again”.

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About Kenn Jacobine

  • Glenn Contrarian

    Oh, that’s good, Kenn, a real work of art! You made this rant:

    Price inflation is already heating up. It was only a matter of time before all the stimulus, low interest rates, and money printing kicked in to produce higher prices. The money supply has increased by 14.6 percent year over year ending in February. That makes 39 consecutive months of double digit year over year rates of monetary inflation.

    And what did you say immediately afterward?

    The result has been higher gasoline and food prices. College and healthcare costs continue to rise. And for the fourth straight month, the Manufacturing ISM Report On Business® (5) shows the number of industries experiencing higher raw material costs on the rise and the number of industries experiencing lower raw material costs on the decline.

    So that’s it! Now we know the real reason the oil prices are going up! It’s all “stimulus, low interest rates, and money printing”! It has nothing to do with speculators or war or collusion between the giants of Big Oil!

    That’s absolutely brilliant, Kenn!

    So we know by your article that it’s only a matter of time until all the socialized First-World nations collapse under the weight of their economic mismanagement (since all First-World nations outside the Middle East have the same kind of economy)…and it’s only then that a New Libertarian World Order will arise! Those who are diligent and skilled will succeed, and those who aren’t, who fail to worship at the feet of Ayn Rand and her apostle John Galt will be exiled from Galt’s Gulch to the outer darkness where there is wailing and gnashing of teeth!

    Yeah, that’s waaaay over the top, but I couldn’t resist. Why? Because I look at the economic systems of the world and I am reminded of a quote by Winston Churchill:

    Many forms of Government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.

    When one looks at the standard of living of the populations of the nations of the world, it becomes obvious that the same thing could be said of the oh-so-socialized First-World nations: Keynesian economics is the worst economic structure…except for all those other forms that have been tried from time to time.

  • Clavos

    A lot of verbiage, Glenn; none of which refuted a single point Kenn made.

    Blah, blah, blah.

  • Glenn Contrarian

    Clavos –

    I should have to refute a point where Kenn claims that the stimulus, low interest rates, and money printing are to blame for oil prices going up????

    If he had only referred to money printing, I might have agreed with him. But to add the stimulus and the low interest rates as culprits for oil prices…

    …um, no.

    It is at that point that he went off the edge of the map, and made it of no use to try to argue the point with him that NO, the stimulus didn’t spike oil prices and NO, low interest rates didn’t spike oil prices. If I’m at fault for something, it’s for not going about pointing out such silly suggestions in a way that you yourself would appreciate.

    You, on the other hand, made a sweeping judgement yourself. So there – tu quoque!

  • Kenn Jacobine


    Where do you think all the money came from that we ave spent? The U.S. Is broke and we had to print it to spend it. My title is 100 percent accurate – Keynesians are Clueless!

  • Glenn Contrarian

    “100 percent accurate” that it was the stimulus and low interest rates caused oil prices to rise?

    There are times in everyone’s life, Kenn, that we have an ‘aha’ moment where we suddenly realize that “that’s how it all happened” and “that’s what it all means”. Problem is, most of the time those epiphanies aren’t epiphanies at all. You’re absolutely sure you know what caused the prices to rise, and that all those ‘clueless’ Keynesian PhD’s are wrong.

    So why is it that almost without exception, the first-world nations which embraced Keynesian economics a long time ago are still on top of the world when it comes to the only REAL standard of a nation’s success: the sustained living standards of its population. Why is that? Why is it that there are ZERO ‘Austrian-school’ economies that are First-World nations?

    Economic theories are all well and fine and call them what you will, but I’m more interested in the RESULTS. And the fact that the Keynesian-school first-world nations ARE First-World nations says a lot. The fact that Austrian-school nations are NOT First-World nations says just as much.

    And I’ll leave you with a curveball – one that I really don’t know the answer to. Yes, the Fed’s printed out a LOT of money in the Great Recession, beginning with the initial bailout, and injected trillions into the monetary system. You and I were both raised to believe that ‘printing lots of money’ isn’t the answer, that it leads to the kind of problems the Weimar Republic had. You and I both believe even now that printing lots of money can’t be the answer.

    But here’s the question – why haven’t we wound up like the Weimar Republic? Why haven’t we suddenly needed wheelbarrows (or ultra-platinum debit cards) to carry all our cash to buy a loaf of bread? It seems to me that before we can condemn outright the actions of the Fed, we have to ask why it is that we didn’t go down into a deflationary death spiral, and why it is that we didn’t have hyperinflation.

    So…why is it that the Fed printed out trillions, but America didn’t become ‘Weimarized’? I really don’t know the answer. What do you think?

  • Kenn Jacobine


    The U.S. has only been a true Keynesian nation since Nixon closed the gold window in 1971 and the floodgates to spending opened. There is such a thing as a lag in economics. We are experiencing the end game of Nixon’s decision now. The Keynesian experiment is exploding before your very eyes!

    Further, the reason we are not in Weimar style conditions right now is also because of a lag. As I mentioned in the article money supply just over the last year has been increasing exponentially. They began priming the pump in 2008 and it took 3 years for it to come out of bank accounts into circulation. As that continues to pick up prices will rise and then see what happens to the price of gold!

  • Glenn Contrarian

    Kenn –

    The problem is, it’s not just America that has to be considered. In order to determine the benefit or lack thereof of the gold standard, one has to examine all – or nearly all – nations that were previously on the gold standard and how they fared since going off the gold standard.

    For instance, how’s Germany doing? Even with all the problems in Europe right now, Germany’s doing quite well – a true Keynesian success story – despite the fact that they’re not on the gold standard and their economy is much more socialized than our own. The difference between Germany and, say, Greece is that what Germany was doing with their money was investing it in developing businesses and in the well-being of the people. Greece, on the other hand, was not investing so much in business (too much corruption) but were instead giving people paid retirement at the age of 55. Greece was setting themselves up for failure by any measure, Keynesian or not.

    You refer to America only being a Keynesian economy after 1971 and the ‘floodgates to spending opened’. Problem is, the ‘spending flood’ and huge deficit spending levels never took off until Reagan – even a cursory look at the numbers will show that! And even given the conservative irresponsibility with the economy (“don’t touch my Medicare, but don’t make me pay the taxes for it!”), we still had a significant surplus when Bush took over and we were on track to pay off the ENTIRE national debt by 2012.

    So what’s happening, Kenn, is that you’re blaming Keynesian economics instead of laying the blame where it truly belongs – corporate greed and political irresponsibility (see “Greece”). The Great Recession happened because of greed and irresponsibility – NOT because of this or that particular economic model.

    The simple facts that the ‘floodgates’ didn’t open until a decade after 1971 and that we still were able to turn around the economy and show a maintainable surplus (before Bush got hold of it) disprove the allegations of failure of Keynesian economics…and prove that economic difficulties often have much more to do with corporate greed and political irresponsibility than with any particular economic model.

  • Igor

    Kenn is simply ignorant of both Keynesian and Austrian economics. His entire education seems to come from book cover jackets and political blogs.

    Economists have known for 200 years that capitalism is basically unstable, i.e., the boom and bust cycle does NOT come from externalities like drought, famine, war, etc., but from SYSTEMIC qualities WITHIN the system. So by controlling those SYSTEMIC attributes policy makers can stabilize the system. Or, nitwits can destabilize the system by emphasizing those deleterious systemic qualities.

    The threat to capitalist systems is positive feedback, i.e., the tendency of people to double-up on winners and double-down on losers. We all have experienced the syndrome. Put the microphone in front of the speaker and positive feedback, unleashed, sends the system howling until it explodes. The price of a stock goes up and everyone piles on.

    The hope for capitalist systems is negative feedback.

    Keynes counter-cyclical policy contributes negative feedback to the system, which, as every tyro mathematician knows, stabilizes the system.

    All of our modern electrical and mechanical systems are utterly dependent on designed-in negative feedback. It is only within my lifetime that we abandoned non-feedback straight-through systems. When I was a lad, and we wanted to build “High Fidelity” music players, we sought vacuum tubes that were ultra-linear, i.e., the signal that went in came out as intact as possible, with as little change as possible. Transistors were laughable (the Raytheon CK722, commercially available for $3) was a joke: totally distorting signals in the audio range. We have Edwin Armstrong to thank for the negative feedback that makes ALL modern electronics work right and sound good, and be cheaply manufactured. Using transistors.

    In fact, negative feedback is the only thing that makes modern systems feasible.

    Negative feedback was absolutely required for the Apollo moonflights.

    Every single electronic device that you enjoy is utterly dependent on negative feedback to accurately save and transmit and receive accurate information through notoriously non-linear transistors.

    Keynes does NOT always recommend government spending. In fact, Keynes’ policy is counter-cycical, i.e., against the trend. When times are good, increase taxes to create savings and pay off debts. When times are bad, spend government money and create government debt.

    Thus, in 2000, when times were good, we should have increased taxes to pay debts and build savings. Instead, we chose to distribute our found money to people (especially the richest people) and thus created positive feedback, which doomed us to the instability that has brought on our current dismay. Perhaps we’ll find a way to recover before we explode or collapse.

    By contrast the Austrian school depends on fixed goals achieved through accurate and efficient mechanisms. Neglecting the old saying that “nothing straight can be made from crooked timber, and man is crooked timber”.

    The Austrians depend on Efficient Markets and constant demand.

    But markets are never efficient, especially when they are manipulated by humans who have partisan interests in outcomes. And everyone does.

    Demand is the imperfect result of desire, and most people are ill-equipped to turn desire into demand.

    It’s an open-loop system: without feedback it can’t correct itself. That’s why the Austrian schools counsel in our current dilemna is to sit tight, do nothing, let it run it’s course.

    They say, abandon all hope and accept your fate. A fate designed for you by the people who distorted the market and hobbled your resources.

    Not good enough. For me, anyway. Is it good enough for you?

  • Peter Pitchford

    Its pure nonsense to claim that Krugman “e entirely missed calling the financial crisis of 2008”. Here is an interview from 2006.

    Also, Krugman has not predicted any “deflationary spiral” One the contrary, he had said that “as the inflation rate goes toward zero, it seems to become “sticky”: in the modern world, rapid deflation doesn’t happen, and in fact slight positive inflation often persists in the face of an obviously depressed economy”.

  • Glenn Contrarian

    Igor –

    Excellent comment – well done on the descriptions of Keynesian and Austrian economic schools of thought.

  • Kenn Jacobine


    I acknowledge the interview you cite but his analysis about how bad it could be wasn’t even close to reality – 6 percent unemployment? Additionally, his remedy as always was to re-inflate the bubble and hurt hiring prospects with new costs on business – healthcare spending, minimum wage increase, tax increases, and of course pump priming – more stimulus. He said nothing about the Fed and the causes of the crisis.

  • Kenn Jacobine


    “But markets are never efficient, especially when they are manipulated by humans who have partisan interests in outcomes. And everyone does.”

    It is the human manipulation that makes them inefficient. Markets, like nature, will always seek equilibrium. Humans seek self-interest and disrupt that delicate balance whether it be in nature or economics. That is why I support minimal government involvement in both. The laws of nature will work things out, it is only when you interject human corruption that things go astray.

    By the way, Austrians believe that government interference and money manipulations are the root causes of recessions and depressions. We don’t depend on “efficient markets and constant supply”. Those things will take care of themselves if allowed to do so.

  • Markets, like nature, will always seek equilibrium.

    Nature does not seek equilibrium. This is evidenced by the fact that the Earth is a very different place now than it was 4 billion, 500 million or even 1 million years ago.

    …You were saying?

  • Glenn Contrarian

    Kenn –

    Austrians believe that government interference and money manipulations are the root causes of recessions and depressions.

    Problem is, without the government interference you decry so much, you’re going to have the money manipulations – just like what caused the Great Recession. A market cannot function well unless it has enough government regulation to prevent runaway market manipulation. All deregulation does – such as the repeal of Glass-Steagal – is to enable such manipulation.

  • Kenn Jacobine


    Nature does seek a balanced state, that is why eventually oil spills would be naturally cleaned up by the splashing tides and famines kill populations because man has acted in some way (oil spill, over population) to disrupt the balance and nature looks to recoup.

  • Kenn Jacobine


    You don’t know the difference between a free market and a regulated market because if you did you would know that a free market did not exist to cause the Great Depression and the Great Recession.

  • troll

    Kenn – don’t you face a ‘Goldilocks’ problem?

    how much coercion (government) is just right to ‘keep the trains running on time’ as required by any ‘successful economy’ especially one based on ‘nick of time’ production?

    as for Glenn Contrarian’s measure of successful keynsianism…the ability to maintain a reasonable living standard for much of the population in the so-called first world has been stressed for over a generation and is based on debt not successful earning…remember when one wage slave could support a family?

  • roger nowosielski

    Apart from the “nick of time” production scenario, which calls for some regulation, consumer and government debt have become the staple of first-world economies since mid-seventies, if maintaining “a reasonable living standard for much of the population” it to retain its status as a social value as well as an index of “how well or poorly we’re doing.” This is one of the inheritances of “the liberal state,” by accretion. Consequently, both “”free markets” and keynesianism are necessary evils and both display the contradictions inherent in the capitalist system.

    There is of course even a more fundamental fact underlying this conundrum, namely that the very formation of (free?) markets is predicated on the existence of the state. Apart from the state, market is a myth, a convenient fiction, no less so than is the idea of barter economy, a hypothesized economy presumed to have preceded the invention of money.

  • roger nowosielski

    …. is to retain (third line)

  • troll

    …Igor’s description of our clockwork economy begs the question of who decides what phenomena constitute negative feedback requiring adjustment

  • roger nowosielski

    You mean it presumes a situation of reasonable knowledge (as to how it’ll turn out), whereas a healthy dose of ignorance is what the doctor ordered?

  • Glenn Contrarian

    Kenn –

    Nature does seek a balanced state, that is why eventually oil spills would be naturally cleaned up by the splashing tides and famines kill populations because man has acted in some way (oil spill, over population) to disrupt the balance and nature looks to recoup.

    You’ve done it, Kenn – you’ve left me…speechless. “Don’t worry about cleaning up oil spills – Nature will take care of them naturally!” It’s not just oil spills, Kenn. It’s irresponsibility across many industries. The BP oil spill could have been much worse, but if we listen to you, we should just avert our eyes from not just the BP oil spill, but also Fukushima, Bhopal, Chernobyl….

    Yeah, don’t worry about the deaths of thousands or the uninhabitability of the areas for thousands of years to come, ‘caues that’s just nature bringing things back into balance, y’see….

    You don’t know the difference between a free market and a regulated market because if you did you would know that a free market did not exist to cause the Great Depression and the Great Recession.

    YES, Kenn, the markets were NOT regulated. Neither were banks! By the day that FDR took the oath of office, five thousand banks had failed – and when they failed, the life savings of the people who had deposited in those banks went *poof*! That’s about three bank failures per day since the Crash, three bank runs with crowds begging to get inside to get even a few cents back per dollar of their deposits. FDR instituted regulations, and what happened?

    Not much. And that’s the wonderful thing – not much happened. We’ve had ZERO – repeat, ZERO – bank runs since the FDIC was instituted. Even at the height of the S&L crisis and the Great Recession, we didn’t see panicked bank runs.

    But to listen to you, that’s a bad thing! To listen to you (and Ron Paul, btw), those bank runs are just a part of the normal market processes, and government should just get out of the way. I guess bank runs in your eyes are just “nature seeking balance”.

    Good grief!

  • Glenn Contrarian

    troll –

    as for Glenn Contrarian’s measure of successful keynsianism…the ability to maintain a reasonable living standard for much of the population in the so-called first world has been stressed for over a generation and is based on debt not successful earning…remember when one wage slave could support a family?

    Gee, I don’t know – does it take two wage-earners to support a family in Germany? I ask because Germany is my prime example of a successful Keynesian economy.

    What’s more, can you point out to me a non-Keynesian economy where it normally takes only one wage-slave to support a family? Hm?

  • Peter Pitchford

    You are again misrepresenting Krugman’s well known warnings about the recent economic downturn. He very clearly said we are looking at a hit to the economy that is as big as the tech bust and, that he didn’t have a hard time seeing unemployment ABOVE 6 percent and he emphasized again and again that it could be significantly worse. You were quite wrong when you said he missed it entirely. Its just not true by any stretch of the imagination.

    You also completely ignore the other point about deflation. What is your source for your claim that Krugman predicted a “deflationary spiral” ? He has clearly contradicted that claim many times. Hey, I have an idea, maybe you should actually read his column.

  • Kenn, nature is not a conscious entity and is not looking to “recoup” anything.

    If an oil spill were left to its own devices then yes, eventually the local environment would settle down to some sort of stable state – but it would not be the same equilibrium as before. Some of the species that lived in the area would be gone, the acidity of the soil along the shoreline would be changed, the watertable might be contaminated, etc.

    It doesn’t require an oil spill for this to happen. Nature is in a constant state of flux, whether it be an oil spill, a volcanic eruption, an ice age or the encroachment of an alien species on a new territory that is the catalyst.

    The fact that individual human lives last only the blink of a geological eye renders the illusion of equilibrium, but in fact everything is changing all the time.

    Whether or not we clean up our goopy black mess makes no difference at all on a geological timescale, but it sure as heck matters to Charlie the cormorant and his chicks, and to Forrest and Bubba whose shrimp fishing livelihood is suddenly in peril.

    What’s absolutely hilarious about your whole hypothesis, though, is that you urge us to let markets “act naturally” when they’re a human invention and completely unnatural to begin with.

    Which makes what you want to do rather like never getting your car’s oil changed, never putting air in the tires and never taking it to the shop, instead placing blind trust in it continuing to run smoothly.

  • troll

    Glenn Contrarian –

    Gee I didn’t realize that the first world had been reduced to Germany…(but to answer your question one would have to take a look at the condition of the German working class which I haven’t)

    and what does your “What’s more, can you point out to me a non-Keynesian economy where it normally takes only one wage-slave to support a family? Hm?” have to do with anything? Hm?

  • roger nowosielski

    Human relations aren’t “unnatural” considering our form of life. Neither are governments, markets, nor any of our institutions, past or present. There are “natural” developments in the history of humankind, not aberrations.

    I think Kenn’s contrast is not ambiguous. By “natural” he should mean “free of interference.” If he doesn’t, then he’s confused.

  • @ Glenn, troll:

    Germany is a special case because the formerly communist East is more economically depressed than the West.

    Eastern German women – whether they are parents or not – work significantly longer hours than their western sisters. (The stats are from pre-recession 2008, but I don’t see any reason that things would have changed much.)

  • troll

    roger nowosielski – I was wondering more just who decides eg what levels of poverty and unemployment are positives that keep our economy on track

  • @ Roger:

    Even if Kenn does mean “free of interference” it’s an arbitrary criterion.

    Any artificially created market has to have some interference, even if it’s just “don’t steal my stuff off my cart while I’m on my lunch break and sell it as your own”.

    In the natural world, that kind of thing happens all the time. Somehow I don’t think even Kenn would be happy with a market that “operated” without even such basic ground rules.

  • roger nowosielski

    Of course he wouldn’t. My only point was, I don’t regard our institutions to be “unnatural.” We’re quite at home with them. In fact, we would be more “unnatural” without them, in a state of nature, as it were.

  • Neat paradox, isn’t it, Roger?

  • roger nowosielski

    Right, but the source, I think, is just equivocation on meanings. The problem arises when the Nature model is taken too seriously, and Kenn may well be doing just that.

  • Glenn Contrarian

    Kenn –

    This is what happens when corporations are able to tell the government what laws they will accept and what regulations they want ignored:

    Under a new law, doctors in Pennsylvania can access information about chemicals used in natural gas extraction but they won’t be able to share it with their patients. A provision buried in a law passed last month is drawing scrutiny from the public health and environmental community, who argue that it will “gag” doctors who want to raise concerns related to oil and gas extraction with the people they treat and the general public.

    […] There is good reason to be curious about exactly what’s in those fluids. A 2010 congressional investigation revealed that Halliburton and other fracking companies had used 32 million gallons of diesel products, which include toxic chemicals like benzene, toluene, ethylbenzene, and xylene, in the fluids they inject into the ground. Low levels of exposure to those chemicals can trigger acute effects like headaches, dizziness, and drowsiness, while higher levels of exposure can cause cancer.

    But I guess this is all part of nature seeking balance….

  • Kenn Jacobine

    No Glenn, it is what happens when government is too big and can be bought by the highest bidder – usually corporations.

  • Igor

    No Kenn, it’s what happens when government is too small to enforce it’s laws, and so small that it can be bullied by big corporations that are allowed to grow at will, in spite of the (disregarded) anti-monopoly laws.

    You would do better to direct your ire at overgrown corps, who do real identifiable damage, than at the phantom of overgrown government.

  • Igor

    We actually have an opportunity to examine a Libertarian Economy, Friedman style, in Chile, after the CIA overthrew the democratically elected Allende government, and Pinochet came to power with “The Chicago Boys”, a group of Austrian economists from the Chicago school of Friedman.

    Chile: the laboratory test

    Many people have often wondered what it would be like to create a nation based solely on their political and economic beliefs. Imagine: no opposition, no political rivals, no compromise of morals. Only a “benevolent dictator,” if you will, setting up society according to your ideals.

    The Chicago School of Economics got that chance for 16 years in Chile, under near-laboratory conditions. Between 1973 and 1989, a government team of economists trained at the University of Chicago dismantled or decentralized the Chilean state as far as was humanly possible. Their program included privatizing welfare and social programs, deregulating the market, liberalizing trade, rolling back trade unions, and rewriting its constitution and laws. And they did all this in the absence of the far-right’s most hated institution: democracy.

    The results were exactly what liberals predicted. Chile’s economy became more unstable than any other in Latin America, alternately experiencing deep plunges and soaring growth. Once all this erratic behavior was averaged out, however, Chile’s growth during this 16-year period was one of the slowest of any Latin American country. Worse, income inequality grew severe. The majority of workers actually earned less in 1989 than in 1973 (after adjusting for inflation), while the incomes of the rich skyrocketed. In the absence of market regulations, Chile also became one of the most polluted countries in Latin America. And Chile’s lack of democracy was only possible by suppressing political opposition and labor unions under a reign of terror and widespread human rights abuses.

    Chile is a tragic failure of right-wing economics, and its people are still paying the price for it today.

    The history of Chile and the “Chicago boys”

    From 1970 to 1973, Salvadore Allende embarked on a “Chilean road to socialism.” From 1973 to 1989, General Augusto Pinochet and his military regime conducted a “silent revolution” (so-called because the free market quietly brought about drastic social change). After 1990, Chile has returned to democracy, but it will be a long time recovering from its experiments.
    …In 1970, Salvadore Allende became the first Marxist to be democratically elected president in the Western hemisphere. In the course of his sweeping socialist reforms, he nationalized not only the copper mines but banks and other foreign-owned assets as well. Along with the redistribution of land under land reform, these actions deeply antagonized Chile’s business community and right wing. It is now a matter of historical record that the CIA helped organize their opposition to Allende. A massive campaign of strikes, social unrest and other political subversion followed. In September 1973, the CIA helped General Pinochet launch a military coup in which Allende was killed. The Pinochet government claimed he committed suicide; his supporters claimed he was murdered.

    The new government immediately began privatizing the businesses that Allende had seized, as well as reversing his other socialist reforms. But Pinochet did not have an economic plan of his own, and by 1975 inflation would run as high as 341 percent. Into this crisis stepped a group of economists known as “the Chicago boys.”

    The Chicago boys were a group of 30 Chileans who had studied economics at the University of Chicago between 1955 and 1963. During the course of their postgraduate studies they had become disciples of Milton Friedman, and had returned to Chile completely indoctrinated in free market theory. By the end of 1974, they had risen to positions of power in the Pinochet regime, controlling most of its offices for economic planning.

    The arrangement was a new one in the history of governments. …Although Pinochet was a dictator, he turned the economy over to the Chicago boys, and his only role was to suppress political and labor opposition to their policies. This arrangement was presented to the Chilean people as the removal of politicians and politics from the nation’s affairs. Instead, technocrats with Ph.D.’s would run the economy according to the best theory available. Those theories, of course, were the “neoliberal” theories of Milton Friedman. Rational science would decide policy, not political slogans and muddled democracy.

    In March 1975, the Chicago boys held an economic seminar that received national media attention. Here they proposed a radical austerity program, “shock treatment,” they called it, to solve Chile’s economic woes. They invited some of the world’s top economists to speak at the conference, among them Chicago professors Milton Friedman and Arnold Harberger. Unsurprisingly, they gave the proposal their highest praise. The plan called for a drastic reduction in the money supply and government spending, the privatization of government services, massive deregulation of the market, and the liberalization of international trade.

    This was not solely the Chicago boys’ plan. It was also formulated by the International Monetary Fund and the World Bank, who made the program a precondition for future loans to Chile. The IMF and World Bank would make similar conditions of other developing nations around the world, but none would implement their program as thoroughly and completely as Chile. Interestingly, the World Bank now holds Chile up as an example to be emulated by the rest of the Third World. Considering Chile’s huge debt and interest payments to the World Bank, it is not difficult to see why. The debt, devastation, inequality and exploitation that the IMF and World Bank bring to Third World countries in the name of “neoliberal development” is another story in itself. Brazil and Peru are two other notable examples , but Chile remains the worst.

    Shortly after the 1975 conference, the Chilean government initiated the Economic Recovery Program (ERP). The first phase of shock therapy was reducing the money supply and government spending, which succeeded in cutting inflation to acceptable levels. However, it also caused unemployment to rise from 9.1 to 18.7 percent between 1974 and 1975, a figure on par with the U.S. Great Depression. Output fell 12.9 percent, making this Chile’s worst recession since the 1930s. (2)

    Meanwhile, to prevent the political consequences of such a shock, the Pinochet regime began cracking down on potential opposition leaders. Many just “disappeared.” The human rights violations of the Pinochet regime will be reviewed below, but, suffice to say, workers “accepted” this austerity program at gunpoint.

    More here:


    …and here:


  • Igor

    Even with that tragic history of failure, Bush was eager to commit the same mistakes:

    Bush’s Chile plan…

    This article appears in the December 17, 2004 issue of Executive Intelligence Review.

    Bush’s Chile Model:

    Take Their Pensions and Run!

    by Cynthia R. Rush

    Almost 25 years ago, in 1981, the free-market ideologues directing the economic policy of Gen. Augusto Pinochet’s military junta in Chile, most of them trained at the University of Chicago in the fascist quackery preached by Milton Friedman and Friedrich von Hayek, privatized that country’s Social Security system. Today, Chile is George W. Bush’s model for Social Security privatization. Chile took $22 billion deposited in the government-run social security fund and handed it over to 18 private investment funds, known as AFPs (Pension Fund Administrators).

    The chief architect of Chile’s privatization scheme was Harvard-trained economist José Piñera, a longtime member of the Cato Institute’s Project for Social Security Privatization, who is cited frequently by President Bush. Piñera has travelled the world to convince, especially, developing sector and Eastern European nations of the benevolence of Chile’s pension and free-trade model.

    Through a splashy multimillion-dollar propaganda campaign, Piñera and Gen. Pinochet’s “Chicago Boys” told Chilean workers the same thing that Bush is telling Americans today. The large number of funds (run by banks, insurance companies, and other financial vultures) would offer workers an array of “choices” on how and where to invest their money, without government looking over their shoulders. They promised workers a high rate of return and a secure future.

    Those who agreed to leave the old U.S.-style “pay as you go” Social Security system and join the new privatized one would experience nothing short of earthly paradise, the privateers vowed. All they would have to do is allow a mandatory 12.5% of their monthly paycheck to be deducted and deposited into the AFP of their choice, from which it would be “wisely” invested. Unlike the old system, employers would make no contribution at all.

    One million Chilean workers did switch to the new system in 1981. They were offered incentives and rewards, including an initial wage increase.

    It Doesn’t Work

    Earthly paradise? In a Dec. 9 conversation with EIR, Manuel Riesco, a board member of the private Center for Alternative National Economic Studies (CENDA), put it this way: This has been a quarter-century experiment and the results are uncontestable. “The system doesn’t work!”

    Reiterating what CENDA stated in its January 2004 report, “Chile: Basis for a Reform of the Pension System,” Riesco said there is a consensus today among “everyone”, the government, AFP administrators, trade union leaders, think-tanks, and even the World Bank (which recently published a report on the subject), that the system is a complete failure. More than half of the people belonging to the system today will not qualify for even the minimum pension of $110, which the state guarantees. That’s 3.3 million people out of a labor force of 6 million. One government study concluded that the number not qualifying for the minimum pension is as high as two-thirds of all affiliates. This has been the case even in years when the rate of return on the AFP investments was 10%, a rate no fund is likely to see again anytime soon.

    As CENDA documents, this is because contributors have not been able to make the required 240 monthly payments into a private fund over a 20-year period. Many low-wage earners registered with the private system evade the mandatory monthly payments by underreporting their income, assuming that the minimum pension will yield more than whatever their retirement accounts offer. A majority of participants only make an average of two to three monthly payments a year.

    In 1973, 77.7% of the labor force was covered by the government’s Social Security system. Today, the old system and the privatized system combined cover only 60% of the labor force; 40% have no coverage at all. Only a tiny fraction of those who contribute to the private system will get pensions that allow them to live decently.

    Those who don’t qualify for the minimum pension may withdraw whatever meager funds have accumulated in their individual accounts, and must apply for the state’s special welfare pension, about $50 a month. But not all of the country’s poorest citizens can be assured even of those small grants, as only 300,000 are available. Chile’s unemployment is 10%; and the 26% of the labor force employed in the “informal economy”, off the books, can hardly make voluntary contributions to any pension fund.

    Stealing by Any Other Name…

    The truth is that Chile’s private pension system is a gigantic Enron-style swindle. The financial sharks who set it up never intended it to be anything other than a mechanism to loot the work force and the economy,…

  • Kenn Jacobine

    Yea, Chile was run by libertarians. My title should have been Igor and Keynesians are Clueless.

  • Glenn Contrarian

    Kenn –

    No Glenn, it is what happens when government is too big and can be bought by the highest bidder – usually corporations.

    “See? Government can be bought by the highest bidder – elect us and we’ll PROVE it by making doggone sure that there are NO regulations in place to prevent it, and we’ll put Supreme Court judges in there who’ll make damned sure that the corporate dollar bill is every bit as much free speech as anything a protester ever said!”

    “Corporations are people, my friend”

  • Igor

    Libertarianism is just a a cover for republicans who are too timid to kick ass.

  • Kenn Jacobine


    Regulations in government are made by the industries that are supposed to be governed by them. Thus, regulations are anti-competition, meant to crush the little guy and any newcomers to an industry. And yes Glenn, that is the major reason I oppose regulations because they are meant to and do help the big players in industry. Look at pharmaceuticals and banking just to name two. In a true free market there are no regulations that benefit one entity over another. If a company has done something to hurt another, fraud, pollution, faulty product, that company is held accountable. Since there are no goodies to give away politicians can’t be bribed for regulatory relief, big bailouts, and kushy deals. That is the system you condone. And Igor, Republicans condone it too – not libertarians.

  • Igor

    No, Kenn, it is unregulated big corporations that destroy the competition of the small guys. With their wealth and monopoly position in markets they can easily outlast tiny competitors and outright threaten their customers to NOT try the little competitors products.

    That is what REALLY happens, which you would know if you had actually worked with executives of big corps that stomp out little competitors routinely to maintain their strangleholds on markets.

    Get out of that ivory tower you hide in! Go out in the real world. Start a small business. Or work staff to a corp exec. Either way the scales will be torn from your eyes!

  • Kenn Jacobine

    How do big companies “threaten their customers”? BTW – unlike most teachers and I am sure academics you admire, I have both worked for a medium sized corporation and owned 3 small businesses. No ivory tower here pal.

  • Igor

    You must really be naive if you haven’t seen big corps threaten their customers.

    Suppose that your distribution business buys a lot of laptops, from a major laptop makers, and you also buy a few laptops from smaller competitors, for competitive analysis and Due Diligence. That Big Guy is going to swoop in pretty soon and threaten to pull that Special Program or that Special Procurement he gave you if you don’t kick out that small supplier. And believe me, his Branch Manager is riding his ass!

  • Kenn Jacobine

    It is called competition Igor. You have to ask how did that big business become so big and wealthy? It is because they provided a superior product at a price people would buy it at. Apple has enriched so many peoples’ lives through its products – that is why it is big and wealthy. Who is naive? The only destructive monopoly is government. It has a monopoly over regulation and its uses that power to rig the game and pick political winners and losers. It threatens its so-called customers with jail, fines, or worse.