In their 2009 book, This Time Is Different, economists Carmen Reinhart and Kenneth Rogoff singled out Australia, Canada, New Zealand and the United States as countries that have never defaulted, or more specifically, have "never outright failed to meet their external debt repayment obligations or rescheduled on even one occasion." Of course, as they later acknowledged on the same page, there are other ways to default.

There is traditional default whereby creditors experience a "haircut" or a delay in payments, and then there’s a stealth default. Looked at in terms of stealth defaults, all those countries, including the U.S., have most definitely stiffed creditors over the years.

Reinhart and Rogoff in particular pointed to a U.S. default in the 1930s. As they wrote, "the abrogation of the gold clause in the United States in 1933, which meant that public debts would be repaid in fiat currency rather than gold, constitutes a restricting of nearly all the government’s domestic debt."

In short, the U.S. defaulted in 1933, and as evidenced by the dollar’s stupendous decline in value from 1/35th of an ounce of gold in 1971 (in private markets a dollar bought roughly 1/45th of an ounce of gold at the time in question) to 1/1550th today, the U.S. has been in default for most of the last 40 years.

All this bears mention in light of Treasury Secretary Tim Geithner’s hysterical comments over the weekend suggesting we’ll see "catastrophic damage across the American economy and across the global economy" if a failure to raise the debt ceiling leads to default. Sen. Pat Toomey, though not an advocate of raising the debt ceiling, said much the same as Geithner in a USA Today op-ed from yesterday. Both doth protest too much. All U.S. creditors have known since 1971 is persistent default by the U.S. Treasury owing to its poor dollar oversight,

Of course if what Geithner and Toomey say is true, the answer is very simple. Geithner’s Treasury collects far more than enough each month to stay current on Treasury interest obligations, so if default really would be the catastrophe that he says, he should make sure to put the U.S.’s creditors first in line for monies available, after which a Congress that’s really never cut spending (thanks to Larry Kudlow for clarifying this) in nominal dollars terms would have to find a way to make do with less money to spread around.

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The still shaky U.S. recovery has the economic commentariat searching for answers. Given a rebound that is far more subdued than previous snapbacks from recession, there exists a belief – albeit controversial – that the economy has reached its limits, or a "new normal" of subpar economic growth.

The above argument has gained greater currency more recently with the release of George Mason University economist Tyler Cowen’s e-book, The Great Stagnation. Cowen is well known as a credible free market economist, so for someone of his ilk to suggest that we’ve arrived at a "technological plateau" that signals reduced growth going forward, there’s arguably cause for worry.

Happily for the worriers among us, we can fairly say that we’ve heard Cowen’s arguments before. In the 1970s a great deal of gloomy commentary made it into the national discussion, and much the same occurred in the early 1990s after the economic boom of the 1980s.

The arguments weren’t credible then nor are they now because they fail to recognize that an economy is not some living, breathing entity, rather it is a collection of individuals acting in their own self-interest. Ideas and energy matched with capital are what drive economic advancement, and while the present may seem bleak, to suggest we’ve hit a plateau is to presume that individuals in the U.S. have run out of ideas. That notion is hard to countenance.

We’ve heard this all before. Much as every period of economic prosperity is thought by many to have no endpoint, that "this time is different," so do times of hardship give rise to naysayers who believe that things will only get worse. The late Robert Bartley noted in his classic 1992 book, The Seven Fat Years, that a popular book in economic circles in the early 1970s was titled The Limits to Growth. Supposedly we were running out of everything, and worse, had no idea how to emerge from our difficulties.

Moving to 1979, then President Jimmy Carter told a group of visitors to Camp David "I think it’s inevitable that there will be a lower standard of living than what everybody had always anticipated, constant growth…I think there’s going to have to be a reorientation of what people value in their own lives. I believe that there has to be a more equitable sharing of what we have…The only trend is downward."

Seeking to provide readers with a sense of how the U.S. economy would perform in the 1990s, Princeton economist Paul Krugman published The Age of Diminished Expectations in 1990, and in it he predicted a fall in productivity, a decline in GDP, and reduced living standards for the average American. It’s notable that at the time of publication the economy was entering a recession, just as economic optimism was similarly down during the generally weak 1970s. But as history reveals in living color, the 1970s economic malaise soon turned to 1980s exuberance. As for the 1990s, while the decade began somewhat subdued economically, by the end of the millennium the economy and stock market were roaring.

What this tells us is that the depressed outlook among certain economists today is hardly new, and even better, that predictions of diminished growth as far as the eye can see have been incorrectly floated before. Be they recessions or merely periods of light economic growth, there’s a tendency toward long-term gloom during times of economic uncertainty. Just the same, many economists tend toward irrational exuberance during periods of plenty.

In the above sense, the negativity expressed by Cowen and others is in no way surprising given the difficult times we’re experiencing. Far from an economy set up for a "new normal" of subpar economic growth for the foreseeable future, Cowen’s pessimism is what’s normal; economic growth at present is what’s abnormal.

Why is Cowen incorrect? Cowen’s thinking is that for hundreds of years the U.S. economy has benefitted from "low-hanging fruit," or easily realized opportunities for powerful economic growth. As he sees it the easy innovations have "started disappearing" and "the trees are more bare than we would like to think."

Of course what Cowen misses is that what he deems "low hanging fruit" only appears that way after the fact, which explains why innovators grow so wealthy for innovating. If grand wealth creating ideas were obvious to everyone, including economists such as Cowen, there would be no profit to be had from bringing them to the market. To presume that opportunities for advancement are limited is to suggest that Americans, along with consumption-driven individuals around the world, are fully satisfied in terms of what they have such that there are no other life-enhancing innovations for enterprising entrepreneurs to create.

The very idea is fanciful because as evidenced by how much of the world remains malnourished, impoverished and generally unsatisfied, entrepreneurs irrespective of country haven’t scratched the surface when it comes to fulfilling our myriad wants. With all due respect to Cowen, that there appears to be very little in the way of low-hanging fruit is for the professor to state the obvious. Indeed, if he were aware of where the opportunities for wealth creation existed, he would raise capital to pursue them rather than teach economics.

What history tells us is that precisely because they’re innovations, the amazing, wealth-enhancing advancements created by the entrepreneurially minded hit us somewhat unexpectedly, and fulfill needs we perhaps didn’t know we had. An easy example here would be Facebook. Started to connect students at elite college campuses, Facebook’s global footprint has grown astronomically all the way to private valuations of the innovator that have reached $50 billion.

When we consider that Facebook began its march upward with a $500,000 investment by venture capitalist Peter Thiel in 2004, we see with great clarity how very unknown are the future generators of wealth. Thiel’s investment is now worth billions, but no one, least of all Cowen, could have predicted Thiel’s windfall when the latter made what was then a courageous decision to commit capital to a nascent start-up.

Cowen’s perhaps more controversial point is that we’ve reached a "technological plateau," whereby Americans have run out of ideas necessary to generate substantial commercial revenue.

A scary thought for sure, but certainly not a compelling one. Cowen’s argument seems to be that Americans have ceased to imagine, a notion that is hard to take seriously. To believe Cowen, is to believe as he implicitly does that there’s a saving’s glut, or too much capital chasing too few ideas.

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With the Obama economy limping along thanks in part to the Administration’s policies in favor of extreme dollar weakness, there’s growing speculation as to his re-election chances in 2012. Will a difficult economic situation that includes high levels of unemployment make Obama a one-term president? History says no given the power of incumbency.

Added to that, another popular narrative of late points to an Obama victory owing to the supposed economic illiteracy of the electorate, along with a media that will provide our weakened president with positive media coverage no matter the state of the economy. Of course the problem with this bit of theorizing is that Americans aren’t stupid, and after that, past elections suggest that those same Americans tend to tune out the media.

Ronald Reagan’s two terms in office tell the tale here. As USA Today media reporter Peter Johnson has put it, “Over the course of his campaigns and eight years in office, Ronald Reagan’s press peaked and fell but was always negative. … In his re-election bid in 1984, 91 percent of his coverage was negative.”

The above is important. Despite a rising economy and millions of new jobs, the media invariably stuck to a number of gloomy themes during the Reagan years, including the rising homeless population, twin deficits, and a generalized assumption that the supposed economic gains of the 1980s were only being enjoyed by the wealthy few. Amidst this constant negativity, Reagan was returned to office in 1984 with one of largest landslide victories in electoral history.

Back then, stocks confirmed what voters already knew – that the economy was doing very well. Despite a major recession brought on by Paul Volcker and the Federal Reserve’s needless flirtation with quantity money targets in the early 1980s, the Dow Jones Industrial Average still returned 134 percent during Reagan’s presidency. Markets and the Electoral College told the truth about an economy and presidency that the media regularly tried to cast in a negative light.

To put it simply, voters aren’t dim and they know when the economy is performing well. Conversely, when the economy is acting badly, voters are well aware once again.

For evidence supporting the above, we must first journey back to Jimmy Carter’s presidency. As William Greider put it in Secrets of the Temple, “Despite the aggravations of inflation, President Carter had presided over one of the longest and most expansive periods of economic growth in postwar history, four years of recovery starting in 1976.”

So while GDP, the frequently faulty measure of economic health, was rising during Carter’s presidency, neither the stock markets nor the electorate were fooled. The recession during the Carter years was the falling dollar, as evidenced by spikes in gold and oil. A falling dollar is always recessionary for limited capital flowing into hard, commoditized assets, and away from innovative ideas that fund our economic advancement.

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Though Rolling Stones’ guitarist Keith Richards’ autobiography is a great read on its own for the remarkable story it tells, there are economic lessons within that apply to all manner of concepts made frequently prosaic by books and newspaper articles. From the wealth gap, to what drives success, to taxation, Richards’ amazing story explains them all in exciting, uplifting fashion.

Considering the wealth gap, it’s often a confused concept. No doubt there are broad income differences throughout the world, but that’s frequently the case because the highest earners regularly reduce the lifestyle gap through innovations that make former luxuries quite commonplace. Richards revealed this numerous times in Life.

Indeed, while Richards’ mother worked as a Hotpoint washing-machine demonstrator, “it took her ages to get her own.” Maytag and Sears come to mind as successful businesses headed by highly paid executives who achieved their pay by virtue of making washing machines broadly accessible. Richards also notes that his family “didn’t have a record player for a long time”, but thanks to innovators who were doubtless well compensated for mass producing the once obscure disc player, someone of Richards’ humble beginnings was eventually able to buy and play music.

The above was particularly important when we consider Richards’ career path. As he put it, “I’ve learned everything I know off of records”, and “Being able to hear recorded music freed up loads of musicians that couldn’t necessarily afford to learn to read or write music, like me.” Economic commentators love to bash the rich as greedy, but the profit motive driving music industry executives provided Richards with a musical education on the relative cheap.

Commentators regularly bemoan inequality in terms of opportunity while seeking government fixes, but Richards’ inspiring story reminds us that starting at the bottom is often a blessing. His first guitar cost 10 British pounds, but since his mother couldn’t afford to pay for it, she got someone else to purchase it, and then that someone eventually defaulted. Notable here is that Richards “couldn’t afford an electric” guitar, but his family’s inability to pay for an electric was instrumental in his rise as a guitar player.

As he explained it, “I firmly believe if you want to be a guitar player, you better start on acoustic and then graduate to electric.” Rather than allow his reduced economic circumstances to act as a barrier to achievement, he accentuated the positive, that he had a guitar, and proceeded to “play every spare moment I got.” Clearly Richards started at the bottom, and had less financial resources to fund his development much as there’s inequality among children today, but this was no deterrent.

Richards’ view is that “if you want to get to the top, you’ve got to start at the bottom, same with anything.” Wise words from a wise man, and something politicians would do well remember as they seek to achieve equality through legislative fiat. Being at the bottom often drives creativity, as Richards’ story attests. Thank goodness British politicians weren’t giving out electric guitars back in the ‘50s.

Considering the Rolling Stones’ humble beginnings as a band, where they began and where they ended up exposes in living color the lie that says upward mobility is a myth. As Richards recounts about the Stones’ early days, “At the time poverty seemed constant, unmovable.” Living in a horrid Chelsea flat with Mick Jagger and Brian Jones, Richards tells the reader about live music venue Wetherby Arms, and how “Usually I’d go round the back and steal their empties and sell them back to them. You got a couple of pence on a beer bottle.”

Every little bit counted because while the Rolling Stones sell out stadiums today, in the early ‘60s they were lucky if they got paid at all for their concerts. Modern theorists would call this exploitation as they do any time individuals or groups are “underpaid” in their eyes, but for the band these allegedly stingy concert promoters provided them with invaluable experience that eventually put them in a position to charge quite a bit.

Still, at the time “hunger was the order of the day” given how bands almost by definition start at the bottom. Of course any profits they were able to cobble together went toward “guitar strings, mending amplifiers and valves. Just to keep what had going was an incredible expensive.” All of this can’t be stressed enough.

For one, the fact that limited profits were immediately reinvested in the business that was the Rolling Stones reminds us how crippling corporate taxes can be, particularly on businesses just getting started. When politicians seek high taxes on businesses they’re robbing them of their future. Second, in the early days they desperately wanted a drummer by the name of Charlie Watts, but they couldn’t initially afford him. Again, when profits are taxed, the ability of a company to grow is compromised.

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Six weeks ago this column observed that with the price of gold having passed $1,500, the U.S. economy was already in the midst of a downturn, and that it would be foolhardy to wait for always backward looking and unreliable government statistics to reveal what gold already had. Though unemployment figures are as unreliable as the rest, Friday’s anemic report points to a slowdown in economic activity that the dollar’s fall in concert with gold’s spike foretold.

The reason why is very basic. Contrary to the popular view among economists that currency devaluation is necessary during periods of economic hardship, debasement works against the very investment that drives company formation and job creation given the tautological reality that any returns on investment will come back in cheapened money.

Gold, the most stable constant of value known to mankind (hence its use as a money measure for thousands of years), doesn’t rise or fall as much as it rises when the dollar in which it’s priced declines in value, and it falls when the dollar in which it’s priced increases in value. If you devalue the dollar you drive investment into hard, commoditized assets that already exist, and that are least vulnerable to devaluation.

Conversely, when currency values are maintained with stability in value paramount, investment flows into stocks and bonds of companies set to create that which doesn’t yet exist. Devaluation is the proverbial blast to the past, while currency stability and strength are forward looking, and this explains why countries have never devalued their way to prosperity.

If we then look back to the most substantial economic contraction of the 20th century in 1920-21, the fact that the gold standard was unshaken amid this unsettling decline in economic activity tells why the economy rebounded so quickly. With investors confident that their delayed consumption (meaning investment) wouldn’t be clipped by the monetary authorities, capital flowed to wealth enhancing activities and the economy roared.

The early ’20s offer other lessons that tell us why the economy boomed 90 years ago, but sags at present.

Indeed, contrary to the Krugmanesque view that governments must spend uncontrollably when economic spirits are down, in the early 1920s our federal government greatly reduced its spending burden on the U.S. economy. Though it spent $6.4 billion in 1920, by 1923 total spending had declined to $3.3 billion.

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There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

~ John Maynard Keynes, The Economic Consequences of the Peace, pp. 235-248.

When Money Dies, the horrifyingly true story of post-World War I Germany’s experience with hyperinflation, was first published in 1975. Largely because the world has been forcibly reacquainted with central banks, and specifically, the U.S. Federal Reserve’s "quantitative easing," this essential book was republished and re-released in 2010.

The German devaluation of the mark, which began during the war, continued at great speed in its aftermath such that, by 1923, the dollar bought 4,200,000,000,000 units of the almost worthless currency. The story of the mark’s descent into nothingness is scarily relevant to what we’re witnessing today on the currency front, and the stories within touch on myriad modern themes about runaway government debt, investor flight to hard assets, and societal unrest related to monetary mischief.

It’s hard to tell the ideology of author Adam Fergusson, but as a read of When Money Dies ably reveals, when it comes to monetary debasement ideology is really beside the point. More important is what Fergusson writes about the consequences. His account of Germany’s currency tragedy will ring true to indviduals of all stripes who’ve witnessed a mercifully pale imitation of the mark’s devaluation since 2001 in terms of the dollar, euro and pound.

The book’s prologue ends with the simple suggestion (echoing Keynes) that "if you wish to destroy a nation you must first corrupt its currency. Thus must sound money be the first bastion of a society’s defence."

With currency destruction used as the dropoff point, Fergusson describes for the reader what happens when money is devalued, and it’s surely a descent into Hell. There are important lessons to be learned in what befell Germany, Austria and other belligerants after the war. Sadly, the stories are all too relevant today.

To begin, it’s most helpful to look into what so many currency watchers miss in noting changing currency values vis-à-vis one another. Fergusson quotes Pearl Buck, who observed the Germans at the time commenting that (p. 5) "‘The dollar is going up again,’ while in reality the dollar remained stable but our mark was falling."

This observation applies equally to the present. Many, including Fed officials and Paul Krugman, argue as evidence for an absence of inflation that the dollar has not fallen drastically against the yen, euro and pound relative to where it was ten years ago. But those are paper currencies. What is perhaps unseen, and which the price of gold reveals, is a greater truth about the dollar’s debasement.

The dollar’s weakness versus other major currencies hides the weakness of every single global currency in terms of gold. Just as the wrongly perceived strength of the dollar in the 1920s gave German citizens false comfort about the mark’s health, at least for a time, the relative stability of exchange rates in modern times obscures a broad run on all national paper currencies.

While Germany’s Bank Law of 1875 required that at least 1/3rd of the mark’s issue be backed by gold, in 1914 the mark’s link to gold was suspended, and thus began its devaluation (p. 9). And to finance the war effort, rather than raise revenues to fund it, a great deal of borrowing ensued. The eventual cost of 164,000 million marks was the equivalent of 110,000 million marks in prewar terms.

The above dovetails nicely with the historically credible view that deficits often work against currency strength, given that governments sometimes use devaluation as a tool for reducing the real cost of debt service. Sure enough, after its defeat Germany faced not only war debt but also war reparations. With the mark’s devaluation up to full speed by 1920, the national debt of 287,000 million marks, though originally £14,400 million in sterling terms, had declined to the equivalent of £1,200 million by October of 1920 (p. 34).

Sadly for the German citizenry, and arguably for the country’s politicians, the German stock exchange was closed during the war (p. 11). This deprived citizen and politician alike of the markets’ warnings of the great economic pain to come. Consumer price spikes were predictably blamed on "war shortages" (p. 11), much as politicians and central bankers today finger demand from China and India as the cause of commodity spikes. The real culprits then and now were able to some degree to escape blame.

When war shortages could no longer suffice as an explanation, "speculators" predictably filled the breech for angry citizens, as they often do today. As Fergusson so clearly puts it, in blaming "the sharpness of the Jews, or the speculators making fortunes in the money markets, they were in large measure still blaming not the disease but the symptoms" (p. 69-70).

Though money supply itself can often provide conflicting signals when it comes to the health of a currency, Dr. Rudolf Havenstein, president of the Reichsbank, took to bragging as the mark collapsed that his Reichsbank "today issues 20,000 million marks of new money daily," and that "In a few days, we shall therefore be able to issue in one day two-thirds of the total circulation" (p. 171). And much as Fed Chairman Ben Bernanke is presently of the view that U.S. inflation is well contained, that broad commodity spikes are merely "transitory" and wholly disassociated from Treasury and Fed policy, throughout the German hyperinflation Havenstein "held firmly to his view that money supply was unconnected with either price levels or exchange rates" (p. 170).

New York Fed President Bill Dudley recently suggested that inflation could "never happen today" thanks to the Fed’s ability to increase interest rates. But the Reichsbank raised interest rates to 30 percent in August of 1923 (p. 167), with no positive effect on the mark.

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Jerry Della Femina, the legendary advertizing visionary, restaurant owner, and alleged inspiration for the popular AMC television show, Mad Men, has shrugged. As he wrote recently in The Independent (East Hampton), in 2008 he “decided that this country was falling in love with an attractive, great-speechmaking hustler/socialist”, and due to the country’s further lurch towards statism, Della Femina has decided to drop out on the way to selling “my houses, my advertizing business, my newspaper and my restaurant.”

Ayn Rand purists will say Della Femina hasn’t exactly shrugged in the Atlas Shrugged sense given his plans to sell his holdings. In Rand’s essential novel, the heroic individuals of commerce simply disappeared, leaving their assets to worthless looters lacking business skills. But that’s nitpicking, and only in fiction would the productive give up all that’s rightfully theirs.

Della Femina has by any rational measure shrugged, and his decision to do so tells us what happens when society’s achievers are fleeced so that the activities of the failed and indolent can be subsidized. Some, as Della Femina plans to do, depart, and we’re all worse off as a result.

Though Della Femina has not said he’s leaving the U.S. altogether, it’s as though he is. This is one of the problems with excessive taxation on the successful.

Whereas light taxation ensures that the greatest number of achievers will participate in the marketplace with the greatest frequency, high levels of taxation mean that some, on the margin, disappear. Individuals with substantial wealth like Della Femina can continue to live in luxury, and they can do so without taking part in the economic activity that moves society forward.

So with Della Femina checking out due to an overbearing, greedy government, those who might want to work for a proven winner will no longer have that opportunity. For those eager to transact with a proven restaurant operator, that option is now closed. And for the companies interested in accessing Della Femina’s Midas touch when it comes to branding the products of others, he’s moving on.

In short, taxes on the rich as my Forbes colleague Charles Kadlec likes to point out, are nothing more than tariffs placed on the rest of us that make it more difficult to have dealings with outsized successes like Della Femina. Della Femina’s departure is all of our loss.

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Back around 2005 when housing was booming, far from a sign of economic vitality, the proverbial "rush to the real" signaled a growing economic downturn. Thanks to a dollar in freefall as evidenced by a spike in the price of gold, always limited capital was migrating toward the hard, unproductive assets least vulnerable to currency devaluation.

To put it simply, the real recession was the housing boom.

Since the dollar’s lurches in either direction tend to set the tone for global currencies, our monetary error was something shared by everyone as a run on paper currencies around the world fostered a global misallocation of capital into land, rare stamps, art, gold and other unproductive assets. The alleged worldwide boom characterized by a rush to the tangible was a classic "money illusion" that flashed economic hardship due to the world’s innovators suffering capital deficits in concert with sinks of hard wealth receiving capital in abundance.

Happily, markets are nothing if not self correcting, and the misnamed "recession" of 2008, which was in fact a positive signal of economic rebound as housing and other hard assets ceased their bull run, was the corrective mechanism meant to reverse a substantial episode of Austrian School malinvestment. Of course, and as is well known now, rather than embrace the curative powers of what was once again a misnamed "recession", the political class set out to blunt its positive effects through bailouts and other subsidies of failed ideas such that Americans were robbed of the positive economic snapback that "recessions" always author.

The above surely looms large at present, because it’s not unfair to suggest that we’re experiencing yet again the severe capital misallocations that forced a distorted correction in 2008. To see why, look at the gold price.

Though it traded in the then nosebleed range of $800/ounce back in 2008, gold has since nearly doubled to $1500/ounce. Its spike to previously unseen levels is a signal that all the chatter about whether there will be a downturn is well too late. Gold at these levels IS the downturn, and an eventual "recession" that hopefully includes a revived dollar to undo all the misallocations occurring at present will be the cure.

Indeed, much as the weak dollar drove a recessionary rush into the real not long ago, so is the same occurring once again. This, not the inevitable correction, is the true recession, and that’s why the gold price (nothing more than a proxy for the dollar’s actual strength or weakness) is so useful as an economic signal.

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“…if an equal proportion of people were educated at the public expence, the competition would soon be so great, as to sink very much their pecuniary reward.” ~ Adam Smith, The Wealth of Nations, p. 151

An all-too-predictable headline blared from the front page of the Wall Street Journal recently, this one about education. Though the article was titled “India Graduates Millions, But Too Few Are Fit to Hire”, it would be easy to put the “U.S.” or some other country with a politically correct worship of the college degree where “India” is, and the story wouldn’t change much at all.

Much as politicians in Illinois long ago heard of the “correlation” between books in the house and intelligent children on the way to a state-run program to put books in underprivileged homes, the oft-cited correlation between a college degree and higher income has driven politicians on the left and right to make attending university a “right” to be enjoyed by everyone. That knowledge gained in college on its very best day has little to no relationship with the work individuals around the world perform once graduated has not deterred a mad political rush to make a college education as universal as healthcare.

Though politicians, educators and their media enablers would have us believe that the act of earning a college diploma makes short people tall, turns bad writers into Somerset Maugham, and the mathematically challenged into highly-paid engineers, reality is happily intruding. What’s going on in India is a good example.

As Geeta Anand reported in the Wall Street Journal, though call-center company 24/7 Customer Pvt. Ltd is eagerly searching for “recruits who can answer questions by phone and e-mail”, it’s found that “so few of the high school and college graduates who come through the door can communicate effectively in English, and so many lack a grasp of educational basics such as reading comprehension, that the company can hire just three out of every 100 applicants.” This is our future.

Indeed, with politicians aggressively promoting advanced education with the taxpayers’ money, the inevitable result will be universities handing out more and more worthless diplomas to marginal attendees who will enter college with no skills, and who will similarly depart without the skills prized by employers. Worse for the victims of this supposed compassion, many will emerge with a great deal of debt as their reward for having wasted four years.

As for those who emerge debt free, they won’t be much better off either. Having spent four years daydreaming through classes on Greek mythology and feminist art history, they’ll have lost four years of real work that actually teaches them how to get by in an advanced society.

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"Work expands so as to fill the time available for its completion." ~ C. Northcote Parkinson, Parkinson’s Law, p. 2

Last fall’s national elections showed that voters are increasingly wise to the basic truth that governments can only spend what’s been taken from them first. From that there’s developed a growing consensus inside the electorate that Washington must mend its profligate ways. Advertisement

As a result, politicians on both sides of the aisle, at least for now, are paying lip service to the idea of reining in Leviathan. What’s unfortunate about their spending rhetoric is the seemingly bipartisan view within the political class that since spending cuts will be "painful," they will require politicians to make a lot of "difficult" decisions. This line of thinking is very much overdone.

Parkinson’s Law makes plain that there’s little relationship between the size of bureaucracies and actual work accomplished. What this tells us immediately is that whatever the good or bad of government services, they could be delivered with a great deal less in the way of people.

Aside from the application of C. Northcote Parkinson‘s theories to government spending, the Founding Fathers clearly intended that the Constitution should restrain the size and scope of government. A simple application of constitutional limits to government activities could easily achieve what Parkinson’s theories may not.

One spending solution that classical economic theory says might be the worst of all of them would be some form of "balanced budget amendment." This should be avoided at all costs because it would legitimize excessive levels of spending that reduce the growth of the private economy.

Instead, the answer to the fiscal problems of the U.S. government is decidedly not tax increases or a balanced budget; rather it’s reduced spending across the board. Anything else ensures a continuance of our large and overbearing federal government.

Parkinson’s Law. While analyzing British naval history, author and scholar C. Northcote Parkinson revealed as false the widely held view embraced by politicians and taxpayers that the need for more civil servants will reveal itself through a growing volume of work completed. The truth is something quite different.

As Parkinson observed, "the number of the officials and the quantity of the work are not related to each other at all." In his case, Parkinson witnessed the non-relationship up close through studies of the Royal Navy’s bureaucracy.

While the Royal Navy could in 1914 claim 146,000 officers and men served by 3,249 dockyard officials and clerks, plus 57,000 dockyard workmen, by 1928 there were only 100,000 officers and men, yet the number of dockyard officials and clerks had risen to 4,558. This, despite the fact that the number of British warships had declined from 62 to 20.

Parkinson went on to point that over the same period, the number of Admiralty officials had risen from 2,000 to 3,569. The British Navy had shrunk by 1/3rd in terms of men, and 2/3rds in terms of ships, thus forcing Parkinson to conclude that the growth in the number of workers for the Royal Navy "was unrelated to any possible increase in their work."

Parkinson went on to lay out what he deemed two "motive forces" for the increase of bureaucracy alongside reduced work output. As he put it, "An official wants to multiply subordinates, not rivals," and secondly, "Officials make work for each other." If an official feels overworked, whether true or not, there’s little incentive to hire someone of similar stature, nor is there incentive to hire just one subordinate. Indeed, if the senior official were simply to hire one subordinate, doing so would effectively make the hire similar in stature to the individual who hired him.

The greater incentive is to hire two subordinates, separate the work assigned to each, and in doing so, make both hires less worthy of becoming rivals of the senior official. Then, if either of the subordinates becomes overworked, the same incentives apply on the way to many employees doing the work previously handled by just one person.

Applied to the myriad bureaucracies which dot the Washington, D.C. landscape, it then becomes apparent why our government costs more and more while achieving less and less. Government is not only intrusive today, but also very expensive thanks to bureaucratic incentives not driven by the profit motive to grow.

The Law of Triviality. Worse for taxpayers, Parkinson also asserts a Law of Triviality, according to which "the time spent on any item of the agenda will be in inverse proportion to the sum involved." It implies that the political act of reducing expenditures is the most difficult of them all.

Applying this insight to politicians, they will sweat the small things they understand (this today is animated by abudant rhetoric about "earmarks", but very little talk of reducing the big-ticket programs that actually matter), while spending little time on the large items. Parkinson explained this through the prism of a multi-million dollar expenditure for an atomic reactor that is voted on without much thought, versus a great deal of discussion concerning smaller, easier to understand line items such as annual spending on coffee for the government’s employees.

Bureaucracies can grow with great speed because all the incentives of employees not policed by investors tilt towards growth. The process is enabled by a political class that can’t possibly understand the activities of so many workers, some of whom live in their districts. The result is then unsurprising, as politicians vote for large expenditures with little regard to their merit.

To fix this, it is illogical for Congress and the President to go to the effort of understanding just what each federal department does on the way to surgical cuts. Better it would be to acknowledge Parkinson’s point that there’s very little correlation between employees and work output. Congress should skip surgical spending cuts in favor of across-the-board reductions that would hit every Washington function equally.

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Back in the late ‘90s at Goldman Sachs, it was a running joke in the equities division that so inept were the firm’s economists, that the best way to put one’s clients into profitable trades was to bet against their projections. Though a buy-and-hold firm by nature, Goldman had clients eager to trade, and the GS economists served as the proverbial muse for clients seeking profitable action.

What’s notable about this is that Bill Dudley was Goldman’s chief economist during the time in question, and presumably the brains behind all those faulty, but paradoxically profitable forecasts. Of course Dudley’s reward for always being wrong was quintessential Washington. Hired away from Goldman to run the New York Fed‘s markets desk, Dudley became a soulmate of sorts with the walking, talking definition of economic ineptitude in the form of Fed Chairman Ben Bernanke, and having worked well with the latter in crafting the bank bailouts that continue to bring our economy harm, Dudley was eventually promoted to the top job at the New York Fed.

Failing upward is something Bernanke (see: bank bailouts, and the subsequent "financial crisis") and Dudley both know well, and now seemingly joined at the hip, there’s no telling the economic damage the two can achieve working together. Sure enough it was Dudley who, according to the Wall Street Journal, "was a key ally in Mr. Bernanke’s push last November to launch the Fed’s $600 billion in purchases of U.S. Treasurys" to allegedly "stimulate the economy." Advertisement

All of which brings us to a recent speech Dudley gave to the Queens (NY) Chamber of Commerce. According to a report in the New York Post, Dudley’s talk didn’t fool many of the attendees, but given his Bernanke-like understanding of economic growth and inflation, no one should be surprised.

Apparently eager to make the case for the impossible, Dudley remarkably told the audience that inflation was under control. But with many in attendance not taking the bait, Dudley noted that "Today you can buy an iPad2 that costs the same as an iPad1. That’s twice as powerful."

Nice try, but were Dudley he more in touch with the history of consumer prices, he would know well that from flat-screen televisions to cellphones (the original Motorola brick phone in the early ’80s retailed for $3,995) to long distance calling, prices fall by definition, and it’s often a function of increased productivity rather than something driven by a well managed dollar.

What Dudley seemingly doesn’t understand is that falling prices on their own are not deflationary, let alone signals of a lack of inflation. Indeed, assuming cheaper or near costless long distance, that merely expands the range of goods individuals can buy on the way of driving up the prices of other products and services.

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For those who follow economic commentary, New York Times columnist Paul Krugman is known as the most prominent advocate of big government solutions to almost any economic malady, real or perceived. Whatever bad, historically discredited economic concept exists, from "stimulus" spending to currency devaluation to tax rate increases to reduce the deficits caused by all the government spending he supports, Krugman is always there to defend each as public intellectualism’s walking, talking embodiment of that which won’t, and hasn’t worked.

The conspiratorially minded among us might say that Krugman is a Republican mole, placed inside the upper reaches of American liberalism’s foremost cathedral to destroy the movement from within, but if true, Republicans themselves wouldn’t so frequently pursue Krugman-lite policies (the George W. Bush years, most notably) on the way to economic hardship. Instead, it should be said that Krugman is a thoroughgoing statist, one who actually believes all that he does with great conviction despite an historical record that would logically give any rational human being pause.

But last week it’s fair to say that Krugman truly stepped over the line. While his droolings are always worth an uneasy laugh combined with horror that some actually take him seriously, his assertion that there’s a racial element behind the drive to achieve a strong, stable dollar was just too much. Krugman should be ashamed, though that ascribes to him a level of self-awareness that he apparently doesn’t possess.

In suggesting that stable-dollar advocates are racists eager to "seek votes from Southerners angered by the end of legal segegration" as a way of returning to "the antebellum era," Krugman unsheathed the proverbial race card from the deck’s bottom, and this is despicable even by his already gutter-level standards.

For background, during Fed Chairman Ben Bernanke’s testimony before Congress last week, Rep. Paul Ryan made the perfectly reasonable and economically tautological assertion that "There is nothing more insidious that a country can do to its people than to debase its currency." From Ryan’s utterly harmless, though very correct statement, Krugman sickeningly derived racist overtones; his argument being that Abraham Lincoln devalued the dollar during the Civil War, and with Republicans (according to Krugman) no longer embracing Lincoln, any criticism of devaluationist policy is not just anti-Lincoln, but also racist for Lincoln’s Civil War having sped the end of wrongheaded secessionist policies in the U.S.

To bolster his shockingly obtuse line of reasoning, Krugman cited one of the witnesses Rep. Ron Paul called before his subcommittee to discuss the Fed, Loyola University professor and Ludwig von Mises Institute senior fellow Thomas DiLorenzo. According to Krugman, DiLorenzo’s not-so-glowing account of Lincoln in his book Lincoln Unmasked: What You’re Not Supposed to Know About Dishonest Abe, signals that he is a racist, and by extension so are the stable-dollar Republicans seeking his testimony on the Fed.

About DiLorenzo, while I’ve not read his book, I’m somewhat familiar with the more libertarian criticisms of Lincoln, and none have to do with race. That Krugman would suggest otherwise is the height of dishonesty, and quite simply wrong.

Libertarian objections to Lincoln and the Civil War have to do with the tariffs imposed by northern manufacturing interests on imports that made it difficult for southern agricultural interests to export their goods. One can’t export without importing, and the libertarian view is that absent the tariffs, the war is less likely.

And while the Civil War was also of course about slavery, individuals such as Ron Paul certainly don’t decry it for ending slavery; rather they correctly point out that slavery was already dying around the world without shots being fired. How unfortunate then that the U.S. needed to suffer the death and destruction of war to rid itself of a tragic institution that would have disappeared soon enough based on its own, anti-human contradictions.

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Economist of
the moment Nouriel Roubini continues to profit from the attention
that has resulted from his alleged prediction of the 2008 financial
crisis. The problem for Roubini is that if looked at objectively,
the ’08 crisis wasn’t financial, and his prediction simple luck.

It was luck
given the basic truth that no one, including Roubini, could have
predicted the global government response that truly authored the
crack-up. Contrary to his view that the moderation of housing was
the crisis, the greater, historically accurate reality is that the
global rush to housing driven by weakening currencies around the
world was the recession. And when the markets started to
correct classical Austrian malinvestment whereby limited capital
flowed into the proverbial ground, the global economy began to heal;
its rebound thwarted by government intervention.

But the crisis
itself was the intervention. Far from financial, it was a government
creation (something Roubini never forecasted) thanks to gargantuan
mistakes being bailed out which disallowed the natural cleansing
of the financial system. Short sellers were subsequently abolished,
thus removing downside protection from the markets, and then worst
of all, investors had to price in a future of muscular government
involvement in the global economy despite the obvious fruits wrought
by economic liberalization over the previous thirty years.

Roubini predicted
none of this. Instead, he remarkably called for a stimulus package
triple the size of the one President Obama foisted on the economy,
and then later on told the Wall Street Journal that U.S.
banks should be nationalized. Not only was Roubini’s ill-gotten
reputation made by the very government intrusion that he advocated,
his post-crisis musings, if implemented, would have made a bad problem
much worse.

Apparently
unwilling to go gently into the night, Roubini continues to dine
out on status that’s been falsely elevated by something he didn’t
predict. Just last week he penned a widely read essay on how the
global economy can avoid a double dip. Here’s hoping he’s ignored,
unless of course we want further economic hardship.

Roubini’s general
contention is that if governments "take away the monetary and
fiscal stimulus too soon – when private demand remains shaky – there
is a risk of falling back into recession and deflation." Rarely
has a mere portion of a sentence been so pregnant with falsehoods
and misunderstandings.

First off,
there’s no such thing as fiscal stimulus of the spending kind. Though
it’s well known at this point, governments can only spend money
they’ve first taken from the private sector. In short, governments
can at best merely steal demand from certain economic sectors in
order to fund generalized waste and a bigger state. There’s no economic
growth to speak of here.

Secondly, it
bears mentioning once again that no act of saving ever detracts
from demand. Roubini’s suggestion that governments must spend when
individuals don’t defies basic economics. Indeed, short of stuffing
dollars/pounds/euros/yen/yuan under mattresses, when individuals
save, their funds are either shifted to others with immediate consumptive
needs, or lent to businesses eager to grow.

Considering
loans to businesses that result from reduced consumption, everything
we have today is the result of past saving. Entrepreneurs can’t
innovate without free capital, and as such, we have Apple, FedEx
and Wal-Mart today thanks to the past willingness among individuals
to forego consumption in favor of saving. If Roubini’s logic is
applied here, governments would confiscate limited capital in order
to fund government growth.

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June
24, 2010