Gone to the first debate, that’s where. American politics is in a class of its own.
The thing about these Keynesians is that they have no shame. The nonsense that Australia avoided recession after the GFC is one of those self-serving myths that will not stand an ounce of analysis. The data above (from the IPA) are the latest much-revised version of what happened to the unemployment rate during the GFC. A rise in the unemployment rate by two-plus percentage points over the course of a few months is recession enough for me, whether or not we actually had two consecutive quarters of a falling GDP. Ken Henry was Secretary of the Treasury at the time, and his advice was “go hard, go early”. So Rudd and Co went hard and early, with the results before us for all to see.
So now the self-same Ken Henry is on the front page of The Australian today with some advice on how to fix the problem that hard and early have led to: Fix budget before the crunch hits, urges Ken Henry.
National Australia Bank chairman and former Treasury chief Ken Henry warns that Australia faces an unacceptable risk with its budget deficit and fears the nation will wait for a painful economic crunch before confronting true financial repair.
In an exclusive interview, Dr Henry issued his most powerful warning about the failure of politicians and the national parliament, saying responsible fiscal policy had become a “pretence”, the economic reform narrative “no longer exists” and politicians are fixated by “appeals to populism”.
Dr Henry said Australia was now running the risk that its AAA sovereign credit rating might be downgraded, coinciding with another global financial disturbance, and in this situation the consequences for Australia “would be truly catastrophic”.
He said this was a “small risk” in relative terms but “the consequences are so large you cannot take the risk”.
Dr Henry said politicians through domestic economic policy failures were now exposing the nation to such risks that the entire reason for the reforms of the 1980s and 90s had been forgotten.
Unless the momentum was recovered, Australia would find “we are right back with Paul Keating’s banana republic statement”.
Well Ken, what a disaster we have created for ourselves. You must tell us where we went wrong. The following gets to the heart of the matter, which one would have hoped a Treasury Secretary would already have known. The quote is from Henry Hazlitt’s Economics in One Lesson which was brought to our attention by Tel on a previous post.
When the government comes to repay the debt it has accumulated for public works, it must necessarily tax more heavily than it spends. In this later period, therefore, it must necessarily destroy more jobs than it creates. The extra heavy taxation then required does not merely take away purchasing power; it also lowers or destroys incentives to production, and so reduces the total wealth and income of the country.
The only escape from this conclusion is to assume (as of course the apostles of spending always do) that the politicians in power will spend money only in what would otherwise have been depressed or “deflationary” periods, and will promptly pay the debt off in what would otherwise have been boom or “inflationary” periods. This is a beguiling fiction, but unfortunately the politicians in power have never acted that way. Economic forecasting, moreover, is so precarious, and the political pressures at work are of such a nature, that governments are unlikely ever to act that way. Deficit spending, once embarked upon, creates powerful vested interests which demand its continuance under all conditions.
Hazlitt also published his Critics of Keynesian Economics of which it is said:
Henry Hazlitt confronted the rise of Keynesianism in his day and put together an intellectual arsenal: the most brilliant economists of the time showing what is wrong with the system, in great detail with great rigor. With excerpts from books and articles published between the 30s and 50s, it remains the most powerful anti-Keynesian collection ever assembled.
And here’s the thing. The book was published in 1960 and other than Mark Skousen’s sadly out-of-print Dissent on Keynes (Praeger 1992) there has not been another attempt to do the same until my own modest What’s Wrong with Keynesian Economic Theory? which was only released last month. It is thus almost twenty-five years since anyone has has brought together a series of critics of Keynesian economics and more than fifty years since the only other. And as scarce as they were even then, critics of Keynes were easier to find, let me tell you, in the 1930s, 40s and 50s [and I might mention that Hazlitt included two nineteenth century articles of sublime excellence by J.-B. Say and J.S Mill]. Such economists are almost completely gone today in spite of there being every reason to think they should be found at every turn.
Now this was very promising: The Reasons Behind the Obama Non-Recovery: It wasn’t the severity of the Great Recession that caused the weak recovery, but government policies, an article by Robert Barro which I was alerted to by a post at Powerline. The Global Financial Crisis was over within six months. The deep and ongoing recession we are in is due to the Keynesian policies that followed.
The essence of a Keynesian policy is to start with Y=C+I+G, assume that the problem is demand deficiency and then try to fix things by raising the level of G. As I have also pointed out in the past, unless government spending is value adding – that is, until whatever is being produced earns revenues greater than their costs – such expenditure is a drain on the economy and will make you worse off, not better. I am near enough the only person I ever come across saying this, so here I lived in hope that perhaps Barro would start to say it. Someone has to say it before we wreck ourselves totally by following one Keynesian idiocy after another.
Here’s the thing. Neither the words “Keynes” nor “Keynesian” show up neither in the original article nor in the comment at Powerline. The vast waste of our resources in one mis-guided stimulus program after another goes unmentioned (although it does show up in a few of the comments). Almost no one even thinks that the problems with policy is the nature of modern economic theory.
The strange thing about my What’s Wrong with Keynesian Economic Theory? is how unique it is. No one seeks to go after the actual problem, which is macroeconomic theory based as it is on deficient aggregate demand. Indeed, no one would even dare to suggest Say’s Law may actually be true, the absolute fundamental guide to managing an economy.
Here it is as it seems to me. I said in 2009 that the stimulus would be a disaster. I wrote my article for Quadrant, The Dangerous Return to Keynesian Economics in which everything that has occurred was mapped out before it began. I started writing my Free Market Economics which is now heading for a third edition. But really, I never thought the reasons for this catastrophic fall in our living standards would remain such a mystery and for so long.
So what’s the new RBA governor like? He is standard issue Keynesian, that’s what he’s like, which means he will never have a clue what’s going on. This is so depressing: Reserve Bank governor Philip Lowe urges government to invest in infrastructure. The opening paras:
Incoming Reserve Bank chief Philip Lowe has appealed to the Turnbull government to help him out with economic management by borrowing big for infrastructure, saying there’s only so much that further cuts in interest rates can do.
In what amounted to a plea to the Prime Minister and Treasurer to take advantage of near-record low interest rates and borrow now that the Reserve Bank’s cash rate was close to zero at 1.5 per cent, he told a parliamentary hearing that monetary policy is “not working as effectively as it might have”.
“One response is to keep doing more of it in the hope that it finally works, he said. “My judgment is that that has not been particularly useful.
“Another option is for some entity in the economy to use the low interest rates to increase its spending. The government could either use its balance sheet or its planning capacity to do infrastructure spending.”
Does he not know that we have already tried the public spending and that it didn’t work. We have also tried low interest rates, and that didn’t work either.
Only private sector spending, where a genuine profit and loss statement in involved, will generate recovery. How about cutting deficit-increasing expenditures and reducing the weight of business regulation? Having seen his first go at giving policy advice, I am not encouraged by what he will now do to rates. As for public infrastructure, right under the AFR story on the RBA, there was this: Communications Minister Mitch Fifield eases NBN charge concerns. Wherein we read:
Investors saw the first real impact of the high wholesale access charges on Tuesday after David Teoh’s TPG Telecom warned that its margins will be cut as more users switch to the NBN under the current pricing model. TPG shares have been savaged since, dropping 24.5 per cent since Tuesday, while shares in Vocus Communications have dropped 10.4 per cent.
Mr Fifield said that “NBN is acutely aware of this issue.” The NBN is under increasing pressure over the charges as telco entrepreneurs warn that the industry may reach a point where some companies may go broke.
NBN would not even exist except for the billions blown by both governments on this ridiculous project. It is now the white elephant in the room and is threatening to devastate the industry. This is government infrastructure at its finest, a perfect example, along with unusable desal plants, green energy projects, billion-dollar Myki cards and beyond the idiocies found across the globe, we in Victoria have billion dollar non-existing roads-to nowhere. Let me give you my favourite quote from Adam Smith.
[Governments] are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”
Written in 1776 and with the words “always” and “without any exception” found in a quote from the normally cautious and careful Dr Smith. No one who has ever read that passage in all the years since it was written has ever seen a government that could be described as in any way different from what was described. It is a passage our new RBA Governor needs to read and takes to heart, while he goes back and has a look at Wicksell at the same time. Haven’t these people ever heard of the private sector?
The front page of The OZ: Interest rate cuts losing power: RBA. The premise is that there was a time that interest rate cuts had done some good, but if so, that was only when they had been set too high. If you would like to understand why interest rates can be too low, and have been much too low everywhere for quite a long time, you should look at the last two chapters of my Free Market Economics. But the main message is that the era of low interest rates is over. Let me therefore take you two articles on the same theme.
The first is Yellen helps Clinton dodge a bullet which comes with the sub-head: “Federal Reserve policymakers keep their key interest rate steady, putting the central bank on the sidelines until after Election Day.” The first sentence of the article is merely about politics. The economics is about what lies in wait. But first that opening sentence:
Scratch one big economic worry off the list for Hillary Clinton.
The worry being scratched off is that interest rates will be raised before the election. Trump knows what a problem this would be for the Democrats better than anyone. Yellen knows exactly what Trump knows, but says the thing which is not like the rest of her leftist tribe:
Fed Chair Janet Yellen also strongly rejected claims lobbed at her by GOP presidential nominee Donald Trump that she is keeping rates artificially low to boost stock prices and aid Democrats.
“I can say emphatically that partisan politics plays no role in our decisions about the appropriate stance of monetary policy,” Yellen said at a news conference after the Fed announced its decision. “We do not discuss politics at our meetings and we do not take politics into account in our decisions.” . . .
“The Federal Reserve is not politically compromised,” she said. “I can’t recall any meeting that I have ever attended where politics has been a matter of discussion. I think the public if they had been watching our meeting on TV today would have felt that we had a rich, deep, serious, intellectual debate about the risks and the forecasts for the economy.”
Since she cannot say otherwise, that was the pre-fab answer. But they of course do think politically 100% of the time, and know full well what will happen when rates start to rise, or even if they hinted that they would rise. It will happen immediately if it’s Trump, more slowly if it’s Hillary, but up they will go. As noted at the end of the article:
The decision [to leave rates where they are] should be a bit of a boost for Clinton, more because it avoids a nightmare scenario than does much to strengthen the economy.
“Nightmare scenario”? What could they possibly mean?
There is then this second article dealing with the same issues: Yellen rejects Trump charges that Fed plays politics. Shorter and again outlines Trump’s complaints in the company of Yellen’s untruths. But it ends with this:
By statute, the Fed is an independent body intended to be shielded from political pressure and whose operations are not funded by the US Congress.
But Fed governors are nominated by the White House and approved by the Senate.
You can see the cynicism in the article but there is even more in the comments to the story. I will just list one, which is like most of the others, and which follows more or less my own sentiments about all of it:
Her denial proves the point. Yellen is a marxist who does Obama’s bidding. If Trump wins in November this fool will raise interest rates in December. Bet the farm on it.
For all that, the sad fact is that the only way our economies can ever get on track is for rates to rise. It will be a rough ride, but without the redirection of savings in productive directions, there is no chance of a recovery either short term or long.
Every year I teach much the same things in much the same way, but my student evaluations, even in different classes during the same semester, has made me suspicious of any of it. So it is interesting to come across this study with the following title: Zero Correlation Between Evaluations and Learning. It’s not that I don’t learn from reading the comments over, but my interest and theirs are not the same. I start out by knowing what I want them to know by the end of the semester, I test them on the knowledge that I want them to have and I find almost all get through. Beyond that, I’m not sure there is much anyone else should ask.
The article comes to this conclusion:
“The multisection studies do not support validity of SET ratings as measure of faculty’s teaching effectiveness. They indicate that students do not learn more from professors with higher SET ratings.”
And as for a student’s ability to judge the education they receive, it will be a long time after graduation that they will ever really know, if even then.
It’s not just that public spending creates no jobs, it is that it also savages our standard of living. It takes a while for the results to become apparent, but the depletion of our capital base must have its effect. GDP data tells you almost nothing, but this is the very thing you must expect:
The young are the ones most affected since they are finding the cost of even buying into the most rudimentary standards at the bottom of the pile are disappearing before their eyes. I will only quote from the last of the articles but it is a problem that is only going to get worse. The story is mainly about young women, but it really is a general issue for the millennial generation who are being shafted left and right.
The younger generation are “despairing and worn out” as they struggle with financial and work problems, a study shows.
Research among 4,000 people aged between 18 and 30 revealed that women are worst affected as they are particularly hit by workplace discrimination.
The Young Women’s Trust said young people are having to “suspend” adulthood, often moving back in with their parents because of low pay.
Huge numbers say they are worn out, lack self confidence and are worried about the future.
The charity called on the Government to appoint a minister for young people, extend the national living wage to younger workers, and do more to help young women cope with work.
I particularly like the bit about “extend[ing] the national living wage to younger workers”. They see the problem but cannot even begin to understand what the actual problem is.