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What If Peter Schiff Is Wrong?

First I want to say that on the one hand, Peter Schiff is a hero for standing up to the ridicule of pundits on Fox Business News and elsewhere as he predicted the collapse of the housing bubble. I think he should receive credit for being courageous in the face of the establishment that scoffed at his predictions. 

And certainly he is right when he talks about the need for housing prices to come down. I have to believe that housing should be no more expensive than three times annual income. If housing prices came down, then certainly people could afford to work for a little less. America needs that competitive edge in a global competition.

And he is probably right about the dangers of debt, and of the difficulty of financing this debt if it grows too large. Investors will shy away from government bonds if major countries weaken. It remains to be seen if the US is at a tipping point. We may have a little more slack than Peter suggests. But he is right to keep our eyes on the subject.

However, I am not so sure that Peter is right about withdrawing stimulus. He could be right, but he could be setting up the risk of real depression. It is fact that the Fed is between and rock and a hard place. On the one hand, deleveraging must take place. House prices must come down, etc. On the other hand, removing stimulus may have the effect of slowing the economy as a whole, causing even more debt and less tax revenue. That is the argument of those who advocate for continuing low interest rates and more government spending. Schiff may or may not be right to oppose this view.

Peter writes some really off the wall stuff as well:

 Other types of regulations, such as those that prohibit discrimination, create incentives for employers not to hire individuals that fall within the protected class. This is the result of potential litigation costs that may result from wrongful termination lawsuits. In other words, the more expensive government makes it to fire workers, the less likely they are to hire them in the first place.
Is Peter advocating that workers not be protected from discrimination? Perhaps we should return to slavery as well, as that seems the cheapest form of labor. Is slapping around labor the answer to our economic problems Peter? Seems that labor has already been attacked by the ponzi loans you so hated. You want to attack labor more and take away the minimum wage too?

And Peter, while the government in part can be a cancer on the private sector, I am sure that private contractors in road building, computer services, prison construction, etc, welcome government contracts. It isn't as one sided as you make it against private enterprise. With the Prius on the ropes, what if the bailed out GM Volt becomes the hybrid of choice? Would that make the bailout of GM look like genius? Of course it would.

Seems to me that bailouts of banks that don't lend took away more from productive activity than the bailout of General Motors. That seems like a no brainer to me. Perhaps Peter Schiff would want all Americans sans bankers to make less so that there will be an even bigger divide between the rich and the poor, with even a weaker middle class than we had before the financial meltdown.

Mr. Schiff is mistaken when he says that public sector spending creates just public sector jobs. Many private contractors work for the government. Government can be good for private enterprise. Government spending can create private sector jobs and does so all the time. Peter sets up a premise that is false and beats it down with his dogmatism. In that sense he is not a very careful thinker. 

Peter Schiff makes one really sensible argument in his article. He is for paying as you go. He believes it is more efficient for the government to raise taxes for spending than just borrowing for that spending:
Some economists point to taxes as the primary job killer, and argue that lower taxes will boost employment. While I have sympathy for this view, it misses the larger issue that the burden of government is not what it taxes but what it spends. The proposed fiscal 2011 federal budget contains "only" 2.4 trillion of taxes. The remaining 1.4 trillion of spending is borrowed (incredibly, for every dollar the government collects in taxes, it now spends almost $1.60). I would argue that a dollar borrowed kills more jobs than a dollar taxed. Therefore, cutting taxes and borrowing the shortfall kills more jobs then it creates. This is true because jobs require capital and government borrowing more directly crowds out private capital investment than taxes do.


Disclosure: no positions