Question about Peter Schiff’s advice
December 4, 2008 – 10:30 pm by JohnIn one of Peter Schiff’s recent commentaries, he repeats a recommendation he’s made many times over the last few years:
Like GM, our economy is in desperate need of a restructuring. Spending must be replaced with savings, and consumption with production. The service sector must shrink and manufacturing must expand to fill the void.
He obviously argues fervently against any bailout or government loan of any kind to any company. So my question to you is: if auto companies are supposed to shrink and restructure, and the workers go do something else profitable and desirable, such as…manufacturing…why is it not okay, according to Peter Schiff, to stay in the automobile-manufacturing business? He says Americans should save, produce things for export, and stop buying so many damn things, so exactly what manufacturing jobs does he have in mind? What do you think he means when he says automotive manufacturing needs to shrink and restructure severely, but our overall manufacturing sector should grow? Does he think Americans should stop manufacturing cars because they are only manufactured to be sold to Americans, who don’t need them? What does he think we should manufacture instead? Other capital goods to sell to other companies and/or products to sell to foreigners? I have assumed this is what Schiff meant in my last two blag posts.
17 Responses to “Question about Peter Schiff’s advice”
I don’t know what Peter Schiff would answer to that, but I’d say one of the main reasons that GM can’t lower their costs is the strict legislation about salaries, working schedules and other “social gains”. In other words, labor is too expensive in USA. A general lowering in the cost of labor would make prices drop, while avoiding much of the unemployment, and lower prices mean that lower salaries have more purchasing power in domestic products. The aggregate effect would be less imports and more exports, which would help the US economy. Austrian economics.
By Martin OB on Dec 5, 2008
Peter Schiff isn’t an Austrian economist. He’s a neo-mercantilist. For example, he thinks that the “exports” in China are destructive to their economy because they don’t consume the exports. In his book, he incorrectly deduced that China has a less economically inteventionist government than the U.S., merely from the observation that they have a larger manufacturing sector than the U.S. According to his book, he also had an flawed understanding of the Austrian Business Cycle Theory.
By anarcho-mercantilist on Dec 5, 2008
You say “why is it not okay, according to Peter Schiff, to stay in the automobile-manufacturing business?”
I don’t think that Peter Schiff is saying anything about whether or not it is okay for anyone to stay in the automobile-manufacturing business. Anyone is free to enter any business they choose. They just shouldn’t have the government pay for them to be in that business.
He isn’t saying all auto manufacturing in the US should shrink and restructure. In the case of the big 3 in particular, they need to shrink because they are on an unsustainable path. They are losing lots of money. Other companies, like foreign auto makers with plants in the US, are producing lots of cars here and they are doing it profitably with no government handouts.
By Nick on Dec 5, 2008
I haven’t read any of Peter Schiff’s books. I think it’s doubtful that, however mercantalist one or two of his statements were, that his entire understanding of economics should be considered mercantalist.
Btw, what exactly do you mean (or does he mean) that China doesn’t consume their own exports? Am I reading that right?
By John on Dec 5, 2008
Nick,
Well, yeah, “okay” wasn’t the best word…obviously he thinks it’s okay for people to do what they want as long as they let others do the same…
Good point about the foreign automakers with plants in the U.S. I knew he hadn’t made any recommendations about those.
It’s just, he thinks Americans consume too much and save too little. He thinks we need to save our money and produce things for export, I guess, and not for our own consumption. So my train of thought, as long and rambling as it was, was: If he thinks our manufacturing should expand, it obviously shouldn’t expand to produce more Americans’ consumer goods. Does he think those auto plants need to be converted to manufacture something other than overpriced American cars…maybe capital goods for American/foreign companies and consumer goods for foreigners? I’m pretty sure the answer is Yes, that’s exactly what he’s saying.
By John on Dec 5, 2008
anarco-mercantilist:
I think you are wrong. For one think, it’s no secret that Peter Schiff follows the Austrian school of economics:
http://en.wikipedia.org/wiki/Peter_Schiff
And then, nothing that he said goes against Austrian economics or towards mercantilism.
He never said the exports of China are destructive for their economy, he said exactly the opposite. What he did say is that the Chinese would be better off without the Americans. That’s because the Americans are essentially giving them IOUs they won’t be able to pay. If you produce and sell something and the client doesn’t pay, it’s bad for you, but if you buy everything with IOUs and you can’t pay them, you are in BIG trouble. That’s what he says.
By Martin OB on Dec 5, 2008
Nick:
“He isn’t saying all auto manufacturing in the US should shrink and restructure. In the case of the big 3 in particular, they need to shrink because they are on an unsustainable path. They are losing lots of money. Other companies, like foreign auto makers with plants in the US, are producing lots of cars here and they are doing it profitably with no government handouts.”
And have you wondered why foreign auto makers are doing so great in the USA? Here’s why (IMO):
http://www.businessandmedia.org/articles/2008/20081204085242.aspx
By Martin OB on Dec 5, 2008
“For one think, it’s no secret that Peter Schiff follows the Austrian school of economics:”
Just because he considers himself as an Austrian economist, it does not mean that he has a clear understanding of Austrian economics. Ron Paul, though a supporter of the Austrian School, supports state intervention in education and public infrastructure. Same thing goes with those conservatives who label themselves as “libertarian.”
“And then, nothing that he said goes against Austrian economics or towards mercantilism.”
Yes, he does not actually want to implement merchantilistic policies because he thinks that these are destructive, but his opposition to the trade deficits; his logic that the lack of a large manufacturing sector in the U.S. is a “bad thing” (this is opposition to the effects of free trade–offshoring manufacturing to cheaper nations; the U.S. will only have a large manufacturing sector if it adopted protectionism); and his opposition to the trade relations (i.e. one nation is “better” than the other; but nations do not exist) are based on merchantilistic logic.
By anarcho-mercantilist on Dec 6, 2008
anarco-mercantilist:
I think you are misinterpreting Schiff’s emphasis on the problem of trade deficit as a mercantilistic reflex.
According to the Austrians (for instance, in Von Mises’s “Human Action”) free trade between two nations is always beneficial to both of them. The cause of a huge trade deficit is never a lack of government intervention, but just the opposite. Governments, through central banks, create an excess of money certificates (not real money, as gold is, but dubious money certificates, like banknotes) and lend it at low rates, that’s monetary inflation .The easy money increases consumption, therefore demand, so commodity prices go up (price inflation), except for imported goods from less-inflating countries (trade deficit). The trade deficit bubble eventually explodes, when the foreign government requires payment in gold. Then the inflating government has to get all this gold, or it can repudiate the debt, but then its citizens can’t buy the foreign products, since their “money” is not accepted in the other country. Tariffs, which make foreign products more expensive, are a way in which governments try to avoid the foreign-trade consequences of their interventionist, inflationary policies. In any case, their citizens are worse off than in a free market.
It may come as a shock, but pretty much all the supposed problems of free markets are in fact caused by interventionism, at least according to the Austrians.
By Martin OB on Dec 6, 2008
Trade deficits can naturally arise without state intervention. Look at Bob Murphy’s criticism about his merchantilist logic:
http://mises.org/story/2531
By anarcho-mercantilist on Dec 7, 2008
Nice article. Here’s another one, even more to the point:
http://mises.org/story/2702
Here’s another one, aknowledging that Schiff was right, after all.
http://mises.org/story/2656
And yet another one, by a different Austrian author:
http://mises.org/story/2637
In summary, yes, the problem is not trade deficit per se, but the fact that trade deficit is caused by consumer goods imports and not capital inverstments, and that this situation, which would not arise in a free market (foreign investors wouldn’t have so much confidence in US consumers to pay back), is sustained by an increase in US public debt. and that’s what Schiff says. In this, apparently, he’s being proven right.
But the main point is that his Austrian critics also recognise him as an Austrian, and there’s no fundamental theoretical disagreement between him and them.
By Martin OB on Dec 7, 2008
“But the main point is that his Austrian critics also recognise him as an Austrian.”
I am an Austrian critic, but I don’t recognize him as an Austrian.
“And yet another one, by a different Austrian”
The second author, Robert Blumen, does not appear to have a full understanding of Austrian economics. His article seems to advocate supply-side economics. He thinks that purely savings, per se, can result in “growth,” regardless of whether or not individuals prefer to deter consumption to fund more productive capital: “It is important to remember that in market economies living standards rise as a result of capital accumulation, which allows labor to be more productive, which in turn results in greater output per worker, allowing for increased consumption and leisure.”
Only technological innovation leads to “growth”; not the increased investment in productive capital, per se, as Schiff believes.
Blumeb, like Schiff, believe that overinvestment, not malinvestment, causes booms: “…Such booms, created by inflation, send false signals to the capital markets that there are additional savings in the economy to support higher levels of investment…” While they nominally say that malinvestment causes the booms, Schiff really believed that it is overinvestment.
By anarcho-mercantilist on Dec 7, 2008
“I am an Austrian critic, but I don’t recognize him as an Austrian.”
I mean those who publish articles at mises.org.
“Only technological innovation leads to “growth”; not the increased investment in productive capital, per se, as Schiff believes.”
Not really. If there’s labor available to operate more machines, you can increase productivity by building more machines, even if they are not better machines.
“While they nominally say that malinvestment causes the booms, Schiff really believed that it is overinvestment.”
No Austrian says that malinvestment causes booms. They said that booms cause malinvestment (and overconsumption). Booms are caused by artificially low interest rates from central banks, according to the ABCT.
An increase in average productivity (production per unit of labor) comes from an increase in quantity and/or productivity of the means of production, which comes from investment, which comes from credit, which comes from savings. If no technological improvement is possible, and no additional buffer of consumer goods is wanted, people naturally stop saving and enjoy more consumption or more leisure time. Thus, saving is always good and never detrimental. That’s the Austrian view.
By Martin OB on Dec 7, 2008
“you can increase productivity by building more machines, even if they are not better machines.”
Resources are scare. Building machines more than the optimal level, as determined by time preference, would draw the resources form coosumption into suboptimal overinvestment of resources in capital goods, leaving little behind for consumption. This distorts the consumer time-preferences.
By anarcho-mercantilist on Dec 8, 2008
“Resources are scare. Building machines more than the optimal level, as determined by time preference, would draw the resources form coosumption into suboptimal overinvestment of resources in capital goods, leaving little behind for consumption. This distorts the consumer time-preferences.”
You say there’s an optimal rate of machine construction, determined by the time preference. I agree to that, I just say that as long as machines are scarce, overall productivity is steadily increased by building more machines (even if they are not better machines), until the optimal amount of machines of this type is built. Then there are no further increases in productivity, until a new technology emerges.
I don’t know why you complain that “this distorts the consumer time-preference”. The consumer time-preference is a given. If people decide to consume less and save more, their time-preference has changed.
By Martin OB on Dec 10, 2008
“You say there’s an optimal rate of machine construction, determined by the time preference.”
I think you are confused here. It’s not just the construction process, but the numerical amount of machines. Lower than free market interest rates reallocate the resources from the market into overinvestment and overconstruction of machines, not the reverse, as you implied.
By anarcho-mercantilist on Dec 10, 2008
“I think you are confused here. It’s not just the construction process, but the numerical amount of machines. Lower than free market interest rates reallocate the resources from the market into overinvestment and overconstruction of machines, not the reverse, as you implied.”
I think we are talking past each other. Again, I’m not defending any kind of interest rate manipulation by the government (I’m an Austrian too!).
Forget macroeconomics for a moment. Let’s say there are two people stranded in an island. They build a food-making machine which needs one person to operate it. So, their average productivity increases. Then they build another, IDENTICAL machine. So, their productivity increases again, and they are both employed, one in each machine. No further increases in productivity can be achieved by building more machines of that type, because there would be no-one to operate them. Then they make a better machine and discard one of the old ones. Their productivity increases again. And so on. That’s what I pointed out, really.
By Martin OB on Dec 11, 2008