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Austrian economics tells us that one of the more subtle harms done by inflation is that it causes malinvestment in ultimately unproductive economic assets. For example, we may be concerned that the current boom in housing will result in overproduction of homes for speculative purposes. Unlimited credit availability has sent a false economic signal that will ultimately result in surplus homes sitting empty or being demolished. In the end, the malinvestment must be liquidated at a loss. But this malinvestment goes far beyond the merely financial. People and nations posture themselves in terms of this false information too. This is the source of America’s absolute labor disadvantage. Decades of prosperity built on the sands of permanent monetary inflation have created enormous social malinvestment that is even harder to unwind than financial malinvestment. Individuals, even industries may face their days of reckoning one by one and “come clean” without disrupting the rest of society. But when society as a whole has been led astray by systemic inflation, only a social and political upheaval can liquidate the malinvestment. Classic economic theory encourages a nation to buy goods from other nations with a comparative advantage that allows them to produce these goods at a lower cost. This much, Americans have cheerfully done. But we may have forgotten the second half of this theory, which states that this process should then release labor and capital to produce goods and services in areas of competitive advantage which can, in turn, be exported to pay for our new imports. Our concern here is that our world reserve currency franchise has encouraged a destructive process of paying for cheap imports with IOUs while exporting large sections of our manufacturing base, all without developing any new industries with a competitive advantage that would allow us to export their products in exchange. Only the explosive growth of debt has allowed us to continue to live as though we were still a highly productive nation. As a result, American workers today are severely handicapped in competition with the world market for labor. They are like a man who is malnourished, addicted to various drugs, infested with internal parasites, loaded with external burdens and constrained by complex rules of behavior, who then tries out for a professional basketball team: he is fit only to be a spectator until he is properly fed, cured of his addictions, purged of his parasites, relieved of his burdens and released from the confinement of regulation. This is the image of “absolute labor disadvantage”. To make this problem a little more personal, imagine a man who for many years has been Vice President of an automotive supply company that recently went bankrupt. He is now looking for work. Naturally, he wants a job that will improve on or at least match his last salary ($150,000 annual); start him out with 3 weeks paid vacation per year and 2 weeks of sick time; company paid health insurance for him and his family; require little to no out-of-town travel; provide a generous retirement plan, and a golden parachute in case he gets fired. He has four kids and a wife to support, a nice house with a large mortgage, 2 car payments, and a second home in Florida. Several relatives also depend upon him for money from time to time. Did I mention his credit card balances? Alas, he finds that there is no market for his services, not on those terms. His choice is to sit idle or go to work again for far, far less then he has been accustomed to earn. He may have to move to a smaller house, sell his second home, drive older cars, tighten his budget and turn away his relative’s requests for money. Like they say, when your neighbor loses his job, we call that a recession. But when you lose your job, it’s a depression! When this happens to one family, they have to make painful adjustments that may take years, but the economy in general goes serenely on. But when this same process happens to an entire national economy, matters are quite different! There is no quick-and-easy solution to these problems, because they require deep and comprehensive social change. Politicians are loathe to even admit the existence of problems that have no ready solution. Lacking any quick-and-easy solutions with a large political constituency, they continue to sweep these problems under the rug for as long as possible. An old joke has a farmer telling his newly elected congressman as he boards the train for Washington, “Remember, Bill, that you can’t cure dysentery with adhesive tape!” Today, the answer would be, “If you use enough tape, Sam, nobody will be able to tell the difference!” Social malinvestments are habits that a society acquires during flush times that it finds it can no longer afford. The evidence of these malinvestments is all around us:
It is easy to see that each of these problems has a powerful political constituency that may wish to see economic problems solved, but only at someone else’s expense. After all, each of these problems has an entire economic infrastructure, and legions of men and women who have devoted their professional lives to building and maintaining it. All of this has produced a situation where the overriding imperative is, “Not on my watch, not this quarter, let someone else pay, and after me, the deluge!" When problems are ignored and avoided as long as possible, it is almost axiomatic that they will finally erupt at the worst possible moment. In the absence of an honest money system that could restrain these tendencies while they were still manageable, only absolute economic hardship can change people’s attitudes enough to liquidate some of these social malinvestments and cure our absolute labor disadvantage. In the end, it is the human heart, where these attitudes reside, that must be changed by hardship before true prosperity can re-emerge.
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