Your must-read to start your Saturday

It's one of those every word of which is so important I don't want to excerpt for fear of diminishing the importance of any paragraph.

I'm talking about Patterico's piece at RedState on Steve Bannon's remarks to the Hollywood Reporter on how he is the main guy on the Trump team pushing infrastructure spending.

Patterico starts by quoting from a speech Bannon gave in 2014 in which he explained the rise of the Tea Party as a reaction by those who understand the true free market to the crony capitalism of the big-shot banks and corporations in bed with government. In that speech, Bannon sounded like he really got it and was going to be a helpful force.

Cue the recent Hollywood Reporter interview, in which he goes rhetorically wild, saying, "I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement."


The 1930s were exciting? Tell it to the 25 percent of the workforce that was out of a job.

Patterico goes on to explain - to Bannon, and the world generally - what the Austrian school of economics taught us about the relationship between interest rates and the contraction or expansion of activity in the business world. (Okay, I've wound up excerpting. So be it.):

Interest rates, which are prices for credit, should not be set by central planners — much like prices of goodsshould not be set by central planners.

The End.

Here is the slightly more detailed explanation — though not as detailed as my previous post:

Businessmen look to the price of credit (i.e. interest rates) as a signal that tells them when it’s best to engage in long-term capital expansion. When the natural rate of interest is low, businesses naturally decide that’s a good time to take scarce resources and allocate them to long-term projects. During such periods, consumers are saving — which releases real resources for the long-term capital expansion that businesses desire.

All this works in beautiful harmony in an economy where interest rates emerge on the market.

Similarly, when the natural rate of interest is high, businessmen forego capital expansion and serve more immediate consumer needs. This matches consumer behavior, because consumers are saving less and spending more.

Again, the beauty of the market in action.

But when central banks manipulate interest rates (as the Federal Reserve does through its open market operations and other policies), this affects the price of credit — and thus distorts the price signal as it applies to credit. Business decide that’s a good time to build up capital, based on the low rate of interest — but it may be a bad time to do that. Due to central bank manipulation of the price of credit, businesses think consumers are saving, freeing up real resources for their large capital expansion. But in reality, consumers are doing nothing of the sort. Consequently, there is a shortage of real resources to devote to the capital expansion. Businesses scramble to compete for the shrinking pool of resources, bidding up prices and causing a “boom.”

And then, as capital expansion proves to be more expensive than anticipated, businesses run into problems. Many fail. Recession or even depression hits, and we get: the “bust.”

This entire boom-bust cycle is driven by the false signals of low interest rates, which mislead businesses into engaging in long-term investments when they are least appropriate.

And the problem is worst in government, which doesn’t respond to market forces anyway. Government taxes citizens — by which I mean to say it seizes money from citizens at gunpoint — and then it spends the money it grabbed. There’s no market involved in any of that. It’s economic “expansion” by fiat. (Sound familiar?)

So when someone like Bannon says “hey, with these low interest rates, it’s a great time to expand!” . . . well, that just shows a blatant ignorance of the work of Hayek and Mises. It’s a policy that is designed to exacerbate the boom, which will inevitably lead to the bust.

And when they want to take your money through taxation (or the money of your children through borrowing), and spend it on projects that the market cannot justify . . . that’s even worse.

And when they have made comments in the past about “the United States’ financial situation” being “so dire” — referencing in particular our almost “hundred trillion dollars of unfunded liabilities” . . . well. They can claim ignorance of business cycle theory — but they can’t rely on a claim ignorance of the fiscal problem we face.

Not their own ignorance, that is. But maybe they’re relying on the ignorance of the population at large.

Maybe this glaring departure from the Bannon of two years ago will come up in his next interview.