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Economics, Finance, Populism, and the Fed: An Interview With David Bahnsen

FEE recently sat down with author and financial advisor David Bahnsen to discuss financial markets, cryptocurrencies, the key to addressing poverty, and his new book.

Image Credit: Buffett777 (via Wiki Commons) | CC BY-SA 4.0

The idea that “there ain’t no such thing as a free lunch” is old and familiar, but like so many popular sayings, it’s unclear where the phrase originated.

While economist Milton Friedman is often credited as the man who popularized the idea—the notion that free lunches don’t actually exist because someone always pays—the adage appeared in Robert Heinlein’s 1966 science-fiction novel The Moon Is a Harsh Mistress nearly a decade before Friedman’s 1975 book featured it in its title. (The phrase is actually the title of Book 3 in Heinlein’s work, for which he received the Hugo Award in 1967.)

Historians, meanwhile, say the phrase had been around for decades prior to Heinlein’s book. Whatever its origins, the idea that there’s no free lunch—that everything has an opportunity cost—is one author David Bahnsen says humans have not learned very well.

For this reason, Bahnsen—chief investment officer of The Bahnsen Group, a National Review contributor, and FEE supporter—featured the concept in the title of his own economics book: There’s No Free Lunch: 250 Economic Truths, released on November 9.

I recently sat down with Bahnsen to discuss his book and a range of economic subjects, including financial markets, cryptocurrencies, and the key to addressing poverty.*

Q: In the introduction of your book, you say many of the problems permeating economic teaching today stem from a flawed definition of what economics is. So let’s start there. What is economics?

I define economics as the study of human action around the allocation of scarce resources. I think you get two components that are both individually well regarded as part of economics. There’s obviously a strong relationship between human action out of the Austrian tradition. And the idea of the allocation of resources being fundamental to what we mean as far as household management has a tradition going to Plato and Aristotle.

I like to blend those two ideas together. It captures the humanity of economics and the incentives in economics. In this definition you won’t find anything that can be reduced to a formula or a mere econometric analysis. The focus is much more on the human person, and much less on mathematics.

Q: You mention Plato and Aristotle. In your book you collected some of the most timeless economic insights in human history—250 quotes, to be precise. How relevant are these ideas today?

I personally believe that they are more important now than they ever have been. There is a certain timelessness to a lot of the wisdom that some of the great classical economists shared. Obviously you can go back to scholastics and the ancients from Aquinas to Augustine to Aristotle and Plato. There are certain nuggets of wisdom and truth there, but I mostly focused my attention on the classical economists.

There’s a lot on Adam Smith, a little from David Ricardo and Jean-Baptiste Say and some highly regarded 19th-century economists. But even as you come into the 20th century, whether it’s Milton Friedman or the supply side contemporaries like Art Laffer and Bob Mundell who recently passed away—even guys like Mises and Hayek haven’t been gone that long—there was a time when these guys were all winning Nobel Prizes in economics.

Now the Nobel methodology has changed completely away from praxeology and the logic of human action to model-driven economics. I think it’s bad for the profession of economics, it’s bad for the academic discipline, but it’s even worse for the laymen and their understanding of how economics affects the real world because it strips out the wisdom of the masters.

And that’s why I wrote the book and centered it around some of their foundational truths.

Q: You’re considered one of the best financial advisors in America by Barron’s, Forbes, etc. What do you make of financial markets right now?

I definitely believe that we’re living in a time—we have been for a while and likely will for some time—that we’re going to have to deal with the good and the bad of the Federal Reserve playing such a prominent role in the economy.

This was always one of the dangers of the monetarist school. Fundamentally, the monetarist always invited a higher role for the Fed into the economy, and we kind of have gotten it. More than just their administration of the money supply by their control of the interest rate, the Fed now has become a sort of mitigator of business cycle risks. When I look at financial markets now, I think that’s mostly what we’re dealing with.

Why are equity market multiples at 22x or 23x earnings? Why is the 10-year bond rate at 1.5 percent, and why are investors totally okay with that? Why are real-estate investors willing to buy very significant real-estate investments for a 3 percent cap rate?

These things all seem quite expensive. But they are all done with a repricing of risk, and that repricing of risk is a byproduct of a Federal Reserve put [a “put”, referring to a put option, is a financial contract that allows the owner to mitigate risk]. We used to talk about a Greenspan put in the stock market, but I don’t think that’s adequate anymore. I think it’s become much more comprehensive. There is an expectation the Fed will be there to smooth out any disruptions that take place in the business cycle.

I think that’s something investors have to understand. They’re not getting the price discovery F.A. Hayek wrote about. They’re not getting the clean allocation of capital I’d like to see as an investor.

Now, I also don’t want to bet against the Fed. I don’t say this to take a blindly pessimistic position. We have to invest for what is, not what we want it to be. But we also have to recognize this is inviting a high degree of malinvestment and misallocation of resources. This requires us to be more prudent and more diligent in the projects we choose to invest in on behalf of our clients.

Q: You say there are major trends in economics today that should be resisted. One is the trend of collectivism as a means of alleviating poverty and inequality. Can you elaborate?

The left-wing risk is relatively well known. A greater invitation into socialism or quasi-socialism. A higher role of the central planner in the economy. But right now a lot of the right-wing populism we’re seeing is inviting a certain amount of authoritarianism. I think it’s doing it out of frustration. There’s a culture war issue, as well as cronyism and the way things are playing out in the economy.

Rather than attack subsidies and the regulatory apparatus, many have said if you can’t beat ‘em join ‘em. That we need Big Government to work for us instead of them. I’m concerned about that approach. When you have a good aim in mind and go about it with bad means, it usually doesn’t work out very well.

My fear right now is that the populist economic ethos is going to embolden and empower the central planner. It’s going to embolden and empower the collectivist.

My hope is that some of the principles I’m inviting people to rediscover in the book can be persuasive. What we need to do is dig in our heels more around the principles of a free society we believe in, and not concede by just trying to switch the uniform of authoritarianism.

Q: I live in the Twin Cities. Minneapolis and St. Paul, like many other cities, recently raised the minimum wage. They also both passed rent control measures. Minimum wage laws. Rent control. Are these effective ways to fight poverty?

No, they are horrible ways to fight poverty. And the reason is explained through the principles that I believe need to be at the foundation of our economics. The knowledge problem leads to a significant distortion in the economy because we ask someone who doesn’t have full knowledge of time and place circumstances to set prices.

When we set prices in a transaction, we take what could take place on a voluntary basis under a precondition of freedom, and we make it happen on an involuntary basis. That takes away clarity. It takes away price discovery. It takes away freedom. It takes away incentives for further developers. It could give false signals to produce.

If one believes that prices, including the price of rent, are packets of information, then rent controls take away information. And because I believe the greatest wealth-building activities in history come about by us adding information and knowledge and ideas to raw materials—that’s where I believe wealth creation comes from—by distorting knowledge I think we effectively suppress the creation of wealth.

I believe that the intent of a lot of the policymakers is good, but I believe that free exchange in the economy will lead to the right calibration of supply and demand to set prices in a way that meets the needs of humanity. The government intervention is not just unnecessary, but counterproductive.

Q: Once upon a time this was basically Economics 101, wasn’t it? So why are these policies coming back? Is it ignorance of economics or is it related more to the populism you mentioned?

The danger of populism is that it lacks a limiting principle. When you’re content to work off a playbook of real principles in the way you develop an economic worldview and structure the scaffolding of what you believe as far as social organization, then I think you’re less exposed to the arbitrariness of populism, less exposed to the potential abuses.

You say there was a time when this was considered Economics 101. I think it’s still Economics 101. It’s just that some people have decided they don’t need Econ 101. They’ll overlook the economic principle on behalf of a desired political aim and what feels right in the moment. That’s by definition what populism is.

Q: You write that class warfare is at an all-time high in the US. Why do you think that is?

If I’m giving a gracious and empathetic answer, I think some of it comes down to the cultural ethos in the post-financial crisis. So many did an atrocious job of identifying the players in the financial crisis and providing proper and comprehensive cultural, political, and economic commentary as to what took place in what was the defining economic event of our lifetime.

Because we let others define that moment, we’re stuck with a narrative of the oppressor and the oppressed out of the crisis. The only difference is many on the right will claim the oppressor was the Fed or Fannie Mae or the government. Many on the left will claim the oppressor was Wall Street or the big banks.

The fact of the matter is we have this environment now where people believe these narratives. If you’re 30 years old, your entire adult life has been bookended by the financial crisis and COVID. People see a system that has not worked for a lot of people but does seem to work for others. It exacerbates class aggravations.

Rather than digging our heels in against cronyism, against a relationship between Fannie Mae and K Street, against bailouts, against a monetary policy that serves to boost asset prices, against the subsidization of student loans that gives college administrators a blank check on how they move tuition prices, we saw more of the same.

A lot of frustrations young people have are frustrations I have. But their emotional intuition is to default to something that makes those problems worse, not better.

We have solutions that address what they’re frustrated about. We need to show that human flourishing is enhanced by free enterprise, but that message is not getting through. I blame those of us on the right who do defend free markets; we’re not defending them well enough.

Q: You bring up young people. They are facing a very different environment than you and I were. Any financial advice for them or tips for living?

I do believe ideologically that young people have been deprived of the ability to learn basic economics, basic finance. I want young people to have a strong self-determination, to believe in self government and the character traits and virtues that are necessary to have a fulfilling and rewarding life.

But when you get to practical finance and engagement with these circumstances, tenacity is the non-commoditized virtue. Young people can’t be replaced by a robot who works harder than them. You can always have a work ethic that will make you desirable in the marketplace.

If I can talk to people before they go to college, I’d say half of the people spending a quarter-million dollars on an overrated bachelor’s degree from an overrated college could rethink that decision. Or at least have a little more specific strategy behind it.

For people who are already graduated or are already in the workforce, I say wealth creation comes from creating more than you consume. That is a tautology that is never going away. That will always be the story of economics, and that’s the best way they can apply it to their own lives.

Q: The sustained inflation we’ve seen in 2021, combined with issues with the supply chain and labor markets, has resulted in a great deal of economic uncertainty. How precarious is the situation right now?

I am of the opinion that a lot of the inflation we’re seeing right now is heavily supply chain oriented. I think the velocity of the money in supply right now is so low and going lower that we do face a lot of Japan-like deflationary risk.

It’s hard to feel that way when prices are doing what you see now, I know. But I think QE and low interests and other distortive measurements of the Fed have a diminishing return for their policy goals. And the excessive government spending has served to take away future growth, so it ends up putting downward pressure on velocity. But then you have an increase in demand for goods and services coming out of COVID, combined with a woeful capacity for production—from port disruptions, labor shortages, to the semiconductor problem, which is quite underrated as a problem.

So I’m a little less concerned about Milton Friedman-like monetary inflation than I am of voluntary supply-driven inflation because we as a society are not producing the goods and services we need.

I’m hopeful some of those things will start to correct. But I’m not hopeful that the economic stagnation that they’ve created through excessive doses of fiscal and monetary policy is treatable.

We’re blessed to have somewhat better demographics, and somewhat better economic organic growth, than Japan. But if we’re going to continue at half—half!—of our real GDP growth rate average for another 15 years, like we have the last 15 years, I think it’s totally unacceptable—both economically and morally. Yet that seems to be in store for us.

I’m hopeful we can somehow get back on track, but right now we’re not even trying to get back on track. We’re just debating how much worse we want to make it.

Q: Do you have any thoughts on cryptocurrencies? Are they a hedge against inflation? A revolutionary new form of money? A pyramid scheme built on speculation fed by the Fed’s money pumping?

I fear that I’ll inevitably lose some part of the audience here, because it’s not a very popular viewpoint right now. But obviously I can’t defend it as an inflation hedge when it has no intrinsic value. The argument many of us have made about money and currency for some time has been it has to be a stable medium of exchange. Anything that goes from $60,000 to $30,000 because of a tweet from Elon Musk is probably not a stable medium of exchange.

I think something whose primary utility is for ransomware criminals is probably not a stable medium of exchange. It will grow in its utility, I don’t deny that, but fundamentally it doesn’t have an intrinsic value. Therefore the question becomes how long regulators will allow it to function the way it does. I don’t think that will be very long.

From an investment standpoint, whether or not one believes in the utility of the medium of exchange, why would the value of a coin inevitably go higher? The only answer for that is speculation.

That does make it more pyramid-like in my mind. Never in my investing life have I seen something end well when the majority of people doing it don’t know why they’re doing it.

Q: Your book includes quotes from some of the greatest economic thinkers of all time. Mises. Hayek. Friedman. Sowell. Bastiat. Hazlitt. Do you have a personal favorite?

I’ve actually been asked this question in other interviews and I have to say the same thing: I just can’t pick one. Hayek at some periods of my life was so instrumental in my development. At other periods of my life Milton Friedman was.

In terms of my own sort of anthropology of economics, the way in which I view the human person and how central my belief about humanity is to economics, I’m grateful to people like Father Robert Sirico at the Acton Institute. There are contemporaries like that in the book who are at the top of my list.

As far as the subject matter in the book that is nearest and dearest to my heart, it is about human flourishing and establishing our aim in economics. The material and spiritual flourishing which includes abundance, but also peace and balance and joy that the human person can have.

What is the economic structure that can most facilitate that? That’s an entirely different question than saying how can we get everyone to make the most similar amount of money to each other, this obsession with equity and wealth and income inequality. In trying to do economics as social justice, we’re trying to do something that is neither economic, nor social, nor just.

Q: That leads right into my next question. You write that a materialistic view of poverty alleviation dominates today’s culture, one that does nothing to alleviate poverty. What’s a better way?

I believe that the number one thing we need to do when we look to alleviate poverty is, first, we need to define poverty and wealth. If poverty is the opposite of wealth, how do you create wealth?

As I said earlier, you create wealth by creating more than you consume. So do we solve poverty by having no supply-side solution, but only think about wealth redistribution?

My view is we need to focus on wealth creation. In a free society of free exchange where there is true respect for the dignity of the human person, we’d never tolerate an approach that treats half of society like they’re incapable of being productive, incapable of being creative, incapable of being innovative—and have them live off the largesse of the other half. I think it’s insulting and dehumanizing.

We want a system that creates more and more wealth creators. That is the solution to poverty. I want more people who produce more than they can consume.

*This interview was condensed and edited for clarity

  • Jonathan Miltimore is the Senior Creative Strategist of at the Foundation for Economic Education.