Monday, January 3, 2011

Niall Ferguson: "The Nasty Fiscal Arithmetic of Imperial Decline"

Here is an excellent lecture by the renowned economic historian, Niall Ferguson, titled "Empires on the Edge of Chaos."  Ferguson eloquently argues that the United States is on a path towards financial ruin as its extraordinary fiscal deficits reach crisis levels - levels that historically have resulted in the sudden (not gradual) collapse of the world's great empires.  While I do not agree with all of his lecture, I found it compelling and insightful.      


madmax said...

I should say, I certainly do not agree with all of his lecture, but I found it very interesting.

I agree. Ferguson could really use Objectivism. If he understood Objectivist epistemology, its quite possible that he could have come up with the historical counterpart to Peikoff's DIM hypothesis.

He made a strong case (in this lecture and elsewhere) that empires don't fall in protracted fashion but rather fall suddenly. But how could he not tie this to the existence of the welfare state and wealth redistribution? And link the welfare state with central banking and constantly inflated government money? And then tie that to the violation of individual rights? And then link that with the dominant philosophies of the time? Well, if he could do that, he wouldn't be a Conservative, he would be an Objectivist.

It is interesting to note that though all of these previous empires fell the countries themselves continued to exist in most cases. Spain, England, France, etc.. So, if we don't end up with a full-fledged dictatorship or a global world war, the fall of the American "empire" (and I do question Ferguson's use of that term to describe America) might actually be a good thing. Perhaps it might also call into question the welfare state and central banking itself. Perhaps it might also launch a true Randian revolution.

In any event, it does look like there are storm clouds on the horizon. Thanks for the link.

madmax said...

Oh, one last thing. Ferguson thinks that we are in a "deflationary recession" unlike the inflationary recession of 79. Is there any truth to that?

With prices rising the way they are in certain markets (food, commodities, etc), it is difficult for me to see how economists refer to this as deflationary. Why, just because real estate prices are falling? They were so damn inflated to begin with.

Doug Reich said...


You make a good observation about his inability to connect, i.e., think in principle. At one point in the Q&A, he explicitly states that he is not an economist but as a historian has simply observed that Keynesianism fails every time it is tried, etc. In other words, he explicitly declare his empiricism.

What's amazing is that I'm just a dumb ol' blogger and he is a renowned Harvard historian, yet I can connect and integrate these events better than he can. It's sad to see someone so brilliant stifled by bad epistemology.

With that said, he certainly makes some great historical observations vis-a-vis the U.S. situation today and certainly comes down in the right direction in terms of practical recommendations.

As to your second comment re "deflationary depression," I think it is very hard for these academics to categorize these events properly because they use improper definitions of terms.

Inflation, properly understood as the increase in the quantity of money above the increase in precious metals, IS the cause of depression AND deflation. That is because it is inflation which sets the stage for depression and deflation.

So, in one sense, all depressions are "inflationary depressions" since they are initially caused by inflation, but at the same time, all depressions could be called "deflationary" since the pain or bust phase of this cycle is when the inflation stops or decelerates, and misallocations begin to be liquidated, businesses start failing, deleveraging occurs as businesses and individuals raise their cash holdings, unemployment rises, prices tend to decline, etc. It is in this sense that he describes the current situation as a "deflationary depression."

How is this different from the 1970's? It is not really at all different in principle, only in nominal terms. The 1970's saw massive inflation, properly understood as increase in the money supply, and this translated into higher prices across the economy. **At the same time prices were rising, the bust occured, unemployment was high, yet prices continued to rise.**

And, how is that different from today? Well, he might say that nominal prices appear to not be up as much as they were in the 1970's in terms of the CPI so this is a deflationary depression and that was inflationary...

First, I don't accept that price aggregates are not up as much. The CPI is notoriously distorted and commodity prices, particularly the gold price, are at or near all time highs. Second,even if nominal prices were not up as much as the 1970's, so what? The important point is that prices are higher than otherwise, not that they are up X% vs. Y%. Other factors, mainly productivity determines how much prices rise in interaction with the money supply. Another way to put it, is that in the absence of the current inflation, prices would be falling at a rapid pace. It is only inflation which is keeping prices from falling!

So, in principle, there is little difference between the 1970's and now. Only difference is in magnitude and duration of various aggregates.

Hope that helps

Doug Reich said...

Oh, just to clarify...What I'm saying is that the essential CAUSES of the 1970's crisis and today are the same, i.e., inflation. It is only different in terms of the degree and duration of the effects, but not the major effects: impairment of capital formation, misallocation of capital, bust, liquidation, high unemployment, malaise, etc.

It is the modern economist improper and superficial definitions of inflation and deflation as "rising prices" and "falling prices", respectively, that lead them into this confusing terminology, as they conflate cause (increase of the money supply) with effect (price increases, boom-bust cycle).

madmax said...


One last question on Ferguson. Here is what his Wiki page says are his fiscal policy views:

The two scholars called for the following changes to the American government's fiscal and income security policies:

* Replacing the personal income tax, corporate income tax, FICA payroll tax, estate tax, and gift tax with a 33% Federal Retail Sales Tax (FRST), plus a monthly rebate, amounting to the FRST a household with similar demographics would pay if its income were at the poverty line. See also: FairTax;

* Replacing the Old Age benefits paid under Social Security with a Personal Security System, consisting of private retirement accounts for all citizens, plus a government benefit payable to those whose savings were insufficient to afford a minimum retirement income;

* Replacing Medicare and Medicaid with a Medical Security System that would provide health insurance vouchers to all citizens, the value of which would be determined by one's health;

* Cutting federal discretionary spending by 20%.

Would any of these be a genuine improvement? Ferguson's entire approach is to not question the welfare-stat or its altruist or egalitarian assumptions. But some of these policies do seem that they would be an improvement. A 33% Federal Retail Sales tax? Would that be better than an income and capital gains tax?

Incidentally, Charles Murray has a similar program. This is the type of stuff that I see from these types of "libertarians" (and they are not true Minarchists).

Doug Reich said...


Yeah, I think if you are going to have a tax then it should be on consumption, not on income and capital, i.e., it's the lesser of two evils. Also, the simpler the better to reduce overhead and compliance.

But you're first point is the most valid. These guys accept the welfare state as a given and then try and manage it to some arbitary level of optimization or something.

If you accept that premise, you are finished. Who is to say 33%? Why not 56%? Then you get the whole train of non-sense we have before us.

So, I'd prefer they take a more principled stand and then only begrudingly state that IF AND ONLY IF you have XYZ options before you, then, option X is the best. They seem to generally accept the welfare state, and therefore, the morality of altruism, as a metaphysical given, as the empiricist/pragmatist intellectual must.

Keith J. Akre said...


First off, I appreciate the blog. A very good read, even if, (and maybe partly because) I do not agree with some of your arguments.

What is compelling me to comment on this, is the fact that I have read a lot of Niall Ferguson and find him to be very insightful and intelligent, however, lately he comes out at times and just feels sensationalist and brash.

Your comments about his American Empire reference are case in point. Its used more to evoke a grandoise tone than it really has a base in reality. I think Mr. Ferguson suffers from a very common "carpenter with only a hammer" syndrome. He takes what he knows best, historical financial disasters, and then draws a long network of parallels from a select number of today's symptoms to say we are certain for the same result.

I dont think its necessarily flawed epistomology as it is a flawed argument in logic.

Cato said...

Couldn't you have a depression caused by a natural disaster or war without inflation?

Doug Reich said...

Now Cato, don't you know that according to Keynesian economists, nothing is better for the economy than natural disasters and war! This is the equivalent of FDR and Obama's makework programs and stimulus spending. It employs people in the rebuild and they can spend spend spend! :)

But, of course, that is nonsense, unless you want to win a Nobel Prize.

Those things are terrible for the economy and certainly could lead to depression, but I usually don't qualify my analysis since it seems obvious that they are exceptional circumstances. For example, if a meteor hit the earth, we all know it would be pretty bad (unless your one of Obama's economic advisors).