An Autopsy for the Keynesians
By John H. Cochrane
This article appeared in the Wall Street Journal on December 21, 2014.
This year the tide changed in the economy. Growth seems finally to be returning. The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy.
No government is remotely likely to spend trillions of dollars or euros in the name of “stimulus,” financed by blowout borrowing. The euro is intact: Even the Greeks and Italians, after six years of advice that their problems can be solved with one more devaluation and inflation, are sticking with the euro and addressing — however slowly — structural “supply” problems instead.
U.K. Chancellor of the Exchequer George Osborne wrote in these pages Dec. 14 that Keynesians wanting more spending and more borrowing “were wrong in the recovery, and they are wrong now.” The land of John Maynard Keynes and Adam Smith is going with Smith.
Why? In part, because even in economics, you can’t be wrong too many times in a row.
Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral. Deflation would lower demand, causing more deflation, and so on.
“We were warned that the 2013 sequester meant a recession. Instead, unemployment came down faster than expected.”
It never happened. Zero interest rates and low inflation turn out to be quite a stable state, even in Japan. Yes, Japan is growing more slowly than one might wish, but with 3.5% unemployment and no deflationary spiral, it’s hard to blame slow growth on lack of “demand.”
Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise. George Washington’s doctors probably argued that if they hadn’t bled him, he would have died faster.
With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. The story is similar in the U.K.
These are only the latest failures. Keynesians forecast depression with the end of World War II spending. The U.S. got a boom. The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.
Still, facts and experience are seldom decisive in economics. Maybe Washington’s doctors are right. There are always confounding influences. Logic matters too. And illogic hurts. Keynesian ideas are also ebbing from policy as sensible people understand how much topsy-turvy magical thinking they require.
Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan’s tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time.
I suspect policy makers heard this, and said to themselves “That’s how you think the world works? Really?” And stopped listening to such policy advice.
Keynesians tell us not to worry about huge debts, or to default or inflate them away (but please, call it “restructuring” or “repairing balance sheets”). Even the Obama administration has ignored that advice, promising long-run solutions to the debt problem from day one. Europeans have centuries of memories of what happens to governments that don’t pay debts, or who need to borrow for a new emergency but have stiffed their creditors once too often. More debt? Nein danke!
In Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume. That’s a hard sell, so stimulus is routinely dressed in “infrastructure” clothes. Clever. How can anyone who hit a pothole complain about infrastructure spending?
But people feel they’ve been had when they discover that the economics is about wasted spending, and infrastructure was a veneer to get the bill passed. And they smell a rat when they hear economic arguments shaded for partisan politics.
Stimulus advocates: Can you bring yourselves to say that the Keystone XL pipeline, LNG export terminals, nuclear power plants and dams are infrastructure? Can you bring yourselves to mention that the Environmental Protection Agency makes it nearly impossible to build anything in the U.S.? How can you assure us that infrastructure does not mean “crony boondoggle,” or high-speed trains to nowhere?
Now you like roads and bridges. Where were you during decades of opposition to every new road on grounds that they only encouraged suburban “sprawl”? If you repeat in your textbooks how defense spending saved the economy in World War II, why do you support defense cutbacks today? Why is “infrastructure” spending abstract or anecdotal, not a plan for actual, valuable, concrete projects that someone might object to?
Keynesians tell us that “sticky wages” are the big underlying economic problem. But why do they just repeat this story to justify inflation and stimulus? Why do they not advocate policies to undo minimum wages, labor laws, occupational licenses and other regulations that make wages stickier?
Inequality was fashionable this year. But no government in the foreseeable future is going to enact punitive wealth taxes. Europe’s first stab at “austerity” tried big taxes on the wealthy, meaning on those likely to invest, start businesses or hire people. Burned once, Europe is moving in the opposite direction. Magical thinking — that, contrary to centuries of experience, massive taxation and government control of incomes will lead to growth, prosperity and social peace — is moving back to the salons.
Yes, there is plenty wrong and plenty to worry about. Growth is too slow, and not enough people are working. Even supporters acknowledge that Dodd-Frank and ObamaCare are a mess. Too many people on the bottom are stuck in terrible education, jobless poverty, and a dysfunctional criminal justice system. But the policy world has abandoned the notion that we can solve our problems with blowout borrowing, wasted spending, inflation, default and high taxes. The policy world is facing the tough tradeoffs that centuries of experience have taught us, not wishing them away.
https://www.cato.org/publications/commentary/autopsy-keynesians?utm_content=buffereb570&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer
NFN, PJ, but articles originating at the Cato Institute are not necessarily trustworthy anymore. I had my own interaction with a Cato article author on a matter of great national import last year and found him remarkably intellectually incurious and, once the major supports for his argument had been undermined, unaccountably unwilling to engage. This are not the traits one expects to see in an organization purportedly committed to constitutional conservatism. So I recommend caution when considering giving free publicity to Cato utterances. As for this article, I noticed a certain sanguine perspective regarding the domestic and global economy that seems entirely unwarranted.
The Obama Economic Record is Even Worse than You Realize
By Chad Stafko
Six years ago this month, America cast its lot toward a young, first-term U.S. Senator from Illinois to lead the greatest nation in the world. His mesmerizing words and bold promises drew folks in by the millions.
However, unless you’re a bleeding heart liberal, you realize the social experiment of electing an unqualified, former professional antagonizer has been an economic disaster.
The quantitative evidence, and it abundant, is overwhelming and ever-growing.
Remember the fanfare of January 2009. Members of the media were fawning all over themselves at what they were witnessing, the first black President of the United States.
Change was coming. All families, not just the rich, would rise in wealth, but especially those with the lowest of incomes. African-Americans would see their lot improve, as would other minority groups. Grand and exciting changes were coming with the 44th President of the United States. Exhilaration filled the air.
Obama seemed the type of leader we needed to right the wrongs of the past and deliver all Americans into prosperity.
Now, six years later, the degree to which Barack Obama has failed, as seen in the data, is quite staggering.
Consider the wealth gap. According to a report from the Pew Research Center, in 2014 upper income households had almost seven times the wealth of middle class households. That is the largest gap between these respective groups in the three decades the Fed has collected such data. Yes, it’s even higher than the “Evil 80s” under Reagan.
Uh, that wasn’t supposed to happen!
Recall President Obama’s campaign exchange with Joe the Plumber when he stated, “And I think that when you spread the wealth around, it’s good for everybody.”
Obama also spoke of his desire to redistribute wealth in a 1998 speech when he said, “I actually believe in (wealth) redistribution.”
Closing the wealth gap is a Utopian goal of liberals and Obama was no different. He campaigned on it.
Yet, lower and middle class Americans, groups with which Democrats so often claim allegiance, have fallen further down the economic ladder under President Obama.
Consider this staggering comparison: In 2007, the average household income in America was $55,627.
In 2014, that figure had slipped to $53,880 — Americans earned less on average than they did seven years prior. So, what has happened is that the average American family has been earning less than it did when the great Recession began. All the while, over that same period prices of practically everything else we buy rose.
Let’s look deeper into segments of wealth within the nation.
According to government data, in 2007 the lowest quintile of earners in America made up 3.4% of total earnings. That means the lowest 20% of earners in America only collected 3.4% of the total earnings pie in 2007.
In 2013 (the latest available data), that figure had dropped to 3.2%. Bear with me on the math, because it is damning evidence of Obama’s Utopian economic failure.
That reduction from 3.4% to 3.2% of total earnings means these folks have seen a 6.25% reduction in the slice of their total earnings pie over that period.
What about the highest earning quintile? Over that same period, their slice of the pie actually swelled from 49.7% in 2007 to 51.0% in 2013.
Those are official government numbers. That’s the undeniable fact that liberals should know — under your Messianic President, the rich literally got richer and the poor got poorer.
Even that bastion of objectivity, The New York Times, cited a National Employment Law Project study in an April article in which it was noted that a million jobs in middle-income industries were lost during the Great Recession. The article added that those million workers then often found themselves either unemployed or flipping burgers at a minimum wage job.
Wow, is that the American Dream that was being ballyhooed by so many when they cast their lot for the Community Agitator from Chicago back in 2008?
I don’t recall breathless anticipation of people having their homes foreclosed or moving from an assembly line at the factory to a food assembly line at the burger joint.
Yet, that’s the reality.
Consider the economic scorecard for African-Americans under Obama?
It’s Dismal.
Some Obama supporters will defend him by saying that the African-American unemployment rate has dropped from 12.7% when he took office to 11.1% as of November 2014, the latest reported month. At first glance that might appear impressive.
However, the reason that figure has dropped is because so many African-Americans have actually dropped out of the labor force.
In January 2009, there were 10,312,000 African-Americans not in the labor force. As of November 2014, the latest available data, that figure had swelled to 11,923,000. That represents more than a 15% increase in African-Americans who have exited the workforce.
Look at food stamps. The latest data indicate that some 46 million or one in seven Americans are on food stamps.
Practically any way you slice the data, Obama’s economic and labor grades are woeful.
Yet, without a hint of shame, six months ago President Obama boasted, “I think you’d have to say that we’ve managed the economy pretty well.”
Really?
It looks like the economic illusionist that is Obama is finally losing his touch…that or folks are finally starting to question him
A CNBC poll in October found that a mere 24% of Americans were confident in Obama’s economic policies and goals.
As for the other 76% of Americans–they have seen through the smoke and mirrors and realize that indeed the Obama reign over the economy has resulted in nothing other than disappearing jobs and earnings.
Chad Stafko is a writer living in the Midwest. He can be reached at stafko@msn.com
Read more: https://www.americanthinker.com/articles/2015/01/the_obama_economic_record_is_even_worse_than_you_realize.html#ixzz3O0eqUSMz
Follow us: @AmericanThinker on Twitter | AmericanThinker on Facebook