ACCI and deficit spending

I did manage to get through Q&A last night but what caught me right from the start was where Wayne Swan, former Treasurer, said to Kate Carnell, the newly installed CEO of the Australian Chamber of Commerce, that ACCI had NEVER sought balanced budgets. Never is a long time and having been the ACCI Chief Economist up until a decade ago, I can say with perfect assurance that at least in my time, ACCI, previously known as the CAI, had never sought anything other than balanced budgets.

Way back, as far back as the days of Bob Hawke as Prime Minister, I wrote an article for our newsletter titled, “An Australian Economic Miracle?” Not many things on the net from the late 1980s, but I did find this:

“An Australian economic miracle, a truly Lazarus-like recovery is now a clear possibility,” says the Confederation of Australian Industry (CAI) in a newsletter this month.

Following the 1987 share market collapse, everyone across the world got religion and more especially Paul Keating here in Australia who balanced the budget in 1988. This was then – and always was while I was there – CAI/ACCI policy. Balancing the budget by lowering expenditure was a near-on certain cure-all for me and so it proved. What then wrecked it all was the almost immediate concern that the economy was overheating that then required the administration of a ridiculously high interest rate regime which brought on the “recession we had to have”. I had to spend the next five years shouting at the government for ruining it all with its monetary policies but it was by then too late.

But in that brave moment in 1988, Australia was set for the most remarkable recovery you ever saw. The flack I took for saying what I said, along with the organisation, was prodigious. But the then Labor Government, having balanced the budget, was indeed overseeing an economic resurrection that at the time no one had noticed was in place. So I wrote the article, signed off by my CEO, and once the recovery became common knowledge, had to endure the idiocies involved in cooling down what had only just picked up.

Balanced budgets work, and deficits do only harm. The evidence that the policies of the classical economists were overwhelmingly better than the policies of every mainstream text of the time, and of today as well, was demonstrated to me, just as it would be demonstrated again when Peter Costello balanced the budgets in the period after 1996. I am therefore pleased to see that Kate Carnell has reiterated the long-term policy of the Chamber.

And if you would like to have a better understanding of the underlying theory, you could not do any better than have a look at my Free Market Economics. Strange to relate, it is to my knowledge the only book of its kind.

Free Market Economics 2nd ed

fme2 cover_Page_1

When I wrote the first edition of my Free Market Economics in 2009, I thought of it even then as the best introduction to economic theory anywhere. It combined five features that were unique to this book: an uncompromising anti-Keynesian core, a microeconomics that rejected the notion of an equilibrium, a focus on the role of the entrepreneur, a discussion of the classical theory of the cycle and the installation of uncertainty as the crucial element in any serious discussion of how an economy runs.

I also had no idea how much more I wanted to say until I came to write the second edition which to my eyes has transcended the first, having been fashioned out of what I learned by teaching the first edition for five years while watching how economic events unfolded following the stimulus. You may only have the author’s word for it here, but there is no book like it. If you want to understand how an economy works based on the English tradition in economic theorising that goes from Adam Smith to John Stuart Mill, there is literally only a single place you can go. The book reverses two “revolutions” in economics, not just the Keynesian of the 1930s, but the marginalist revolution of the 1870s as well. It is a companion volume to David Simpson’s wonderful The Rediscovery of Classical Economics, also co-published by the IEA. Reading the two will provide you with an understanding of just what is wrong with economic theory today. That traditional policy based on standard economic theory is ruining our economies is beyond any doubt, but the reason why that is so will nevertheless remain incomprehensible to anyone who continues to believe that aggregate demand is a valid concept in trying to make sense of economic events or that equilibrium has much if anything to do with how an economy works.

My Free Market text was written in a kind of white heat over twelve weeks as the text for the course I was giving during the first months of the worldwide introduction of stimulus packages pretty well everywhere. The absolute dead certainty I had was that public sector spending whose only aim was to create jobs would end in disaster, as it most assuredly has. Our economies are sinking under the weight of massive levels of unproductive public spending and debt levels that continuously subvert every attempt to wind them back. Yet you cannot go to any standard economics text even for an inkling of why that is.

To understand any of this you must first understand Say’s Law. Say’s Law was the bedrock principle of economic theory from the earliest years of the nineteenth century until swept away in a fit of distraction by the publication of Keynes’s General Theory in 1936. It is founded on recognising that only value adding production can create economic growth and add to the number of jobs. The most central chapter in the book is the chapter on Value Added, a chapter found in no other text that I know of. Yet without understanding value added, understanding that every form of production not just creates more goods and services but also at the same time uses up existing goods and services during the production process, it is impossible to think about public spending and economic policy correctly. Only if what is produced has greater value than the resources used up can an economy grow. Government spending seldom creates value. The stimulus was therefore doomed to fail as is so much of the policy matrix found today.

The strangest part about the book, however, was for me to discover my own beliefs on the nature of economic theory. There is not a chapter in it that would fit into a standard economics text. All of it takes you back to an earlier time and a different theoretical matrix. Space is too short to tell you much more but let me draw you to the cover which shows a water mill on a plaque made of clay. This is because the two most important influences on my own way of thinking have been two of the greatest economists England has ever produced, John Stuart Mill and Henry Clay.

I can do no more than encourage you to read this book. It is a defence of the market economy published at a time when there may never been a greater need for such a defence.

The worst American president ever

obama intelligence cartoon

I guess on this one he can’t blame George Bush so he blames someone else:

President Obama largely blamed the United States’ intelligence community in an interview broadcast Sunday for giving an incorrect assessment of the capabilities of the Islamic State in Iraq and Syria (ISIS).

“Our head of the intelligence community, Jim Clapper, has acknowledged that, I think, they underestimated what had been taking place in Syria,” Obama said on CBS’s “”60 Minutes.” . . .

Obama’s remarks served as an acknowledgement that the United States in recent years has been largely unaware of the power behind ISIS, which has been characterized as a terrorist group with some qualities of state-backed military forces. . . .

Obama also admitted that the United States overestimated the willingness of allies such as Iraq to join in the fight against ISIS.

Golf and shooting hoops is not the kind of work that will get you plugged into the needs of the moment. It also doesn’t help that he surrounds himself with people who will not criticise what he does. Here’s an article with video that sets things pretty straight about the kinds of associates he has, OBAMA: “Wherever I See Folks, They Always Say… You’re So Great” .

Obama must only be getting his feedback on the golf course as the rest of the country doesn’t think he’s so great these days. A Reuters/Ipsos poll released last week had Obama at a dismal 35% approval rating.

Even the black community’s support is starting to erode. A Zogby poll from earlier this month had Obama’s support among African-Americans declining form 91% to 78%.

I think there may have been a palace coup of sorts by various Democrats since he is no longer in charge the way he once was. From the man who was going to shut down Guantanamo and pulled the troops out of Iraq things have been changing in some very definite ways in the opposite direction.

More evidence the planet is cooling

lowmax_sep_11_sep_20_2014

Sure the planet is warming. Look at all the evidence: NOAA: 1695 Low Max Records Broken or Tied From Sept 11 to Sept 20. One record broken by 25F. I wrote my article on Global Cooling because the evidence that the planet is cooling and not heating is becoming more abundant. This is from the link:

1695 Low Max Records Broken or Tied From Sept 11 to Sept 20 according to the NOAA.

A “Low Max” means that the maximum temperatures for the day was the lowest it has ever been. This indicates daytime cooling.

Above is a screenshot showing location and the biggest difference between old record and new record.

The list is just the ones I could capture in a screenshot.

Paul Krugman has no idea what Say’s Law means

In the same week that the 2nd edition of my Free Market Economics has been published, which I began specifically in response to the stimulus that followed the GFC and the certainty that it would fail because of the principles that underlie Say’s Law, I have received copy of a review of a book titled, Seven Bad Ideas. The book is by Jeff Madrick while the review is by none other than Paul Krugman. And here once again we find Say’s Law, as the second worst idea in economics, just after the number one bad idea, “the invisible hand”. If you think the invisible hand is the worst idea economists have ever come up with, you are near enough not an economist, more a charlatan but then he has the Nobel Prize so who’s to argue. This is what Krugman thinks the invisible hand means amongst economists:

Today the phrase is almost always used to mean the proposition that market economies can be trusted to get everything, or almost everything, right without more than marginal government intervention.

What “everything, or almost everything” might consist of is a quite bizarre notion. The reality is that no one thinks an economy will run without institutional intervention at almost every facet of an economy’s operation. Every economist is perfectly aware of the absolute necessity of an institutional structure, much of it at the hands of government, and much of it based on legislation and regulation. There are debates about the sorts of regulation needed and the kinds of legislative penumbra that has to surround an economy. But the notion an economy requires only “marginal” intervention is nonsensical and straightforwardly untrue.

But so what if there are economists who think this. The absolute reality is that every economy has regulation up to its eyeballs. If some of us think less regulation would be better is hardly evidence that the economy is doing poorly because of its absence. You would have to be utterly out to lunch to think the regulation of any economy in the world could be described as light-handed. There must be quite a few gullible types out there if the kind of statement that Krugman makes can carry any weight at all.

But it is the second supposedly bad idea that is an old story. It is what is known as Say’s Law which in its micro form states that demand is created by value adding supply and in its macro form states that no economy ever goes into recession because of a lack of demand and that an economy in recession cannot be resurrected by a stimulus made up of non-value adding forms of expenditure. The macro version condemns just the kinds of expenditure every single stimulus has consisted of. The issue isn’t crowding out. The issue is that public spending uses up more value than it creates. If you waste your resources, your economy will shrink. That is what has happened universally since the “stimulus” and Krugman has not a clue in the world what has gone wrong. Here is what he wrote:

No. 2 on Madrick’s bad idea list is Say’s Law, which states that savings are automatically invested, so that there cannot be an overall shortfall in demand. A further implication of Say’s Law is that government stimulus can never do any good, because deficit spending by the public sector will always crowd out an equal amount of private spending.

But is this “mainstream economics”? Madrick cites two University of Chicago professors, Casey Mulligan and John Cochrane, who did indeed echo Say’s Law when arguing against the Obama stimulus. But these economists were outliers within the profession. Chicago’s own business school regularly polls a representative sample of influential economists for their views on policy issues; when it asked whether the Obama stimulus had reduced the unemployment rate, 92 percent of the respondents said that it had. Madrick is able to claim that Say’s Law is pervasive in mainstream economics only by lumping it together with a number of other concepts that, correct or not, are actually quite different.

Economists can say all they like that the stimulus lowered the unemployment rate but the fact of the matter is there cannot be any actual evidence one way or the other. That the models used by economists almost universally say that a stimulus will reduce unemployment is of itself the only “proof” that it has. The logic goes:

Major premise: a public sector stimulus will reduce unemployment below the level it would otherwise have reached

Minor premise: most economies introduced a public sector stimulus

Conclusion: the stimulus reduced unemployment below the level if would otherwise have reached.

That is, A causes B. There was A so therefore B. There is no evidence since there are no controlled experiments. All this is by assumption only. Well two can play at that game.

Major premise: a public sector stimulus consisting of non-value adding forms of expenditure will keep unemployment higher than it would otherwise have been

Minor premise: most economies introduced a public sector stimulus consisting of non-value-adding forms of expenditure

Conclusion: the stimulus has kept unemployment higher than it otherwise would have been.

And the fact of the matter is that the American labour market has not returned to the level it was at in 2008. Unemployment is a disaster without the slightest evidence that matters are on the mend.

Paul Krugman has not a clue. He is stuck in that Keynesian bunkum from which no actual evidence from the real world will ever dislodge him. The American economy continues to sink because of the straight out ignorance of basic economics of pretty well the entire economics profession (approximately 92 percent). Nothing can be done about it in the short term, but the smug smarmy superiority in the face of the immense harm that he and his likeminded colleagues have caused makes me very angry indeed.

Krugman is obviously a hopeless case. But I will simply state that economic theory will never provide useful guidance during recessions until Say’s Law is once again seen as the fundamental principle it is. And if you are interested in what it means and why it matters, the 2nd edition of my Free Market Economics is the place to start finding out.

Another forgotten moment in history

hitler stalin pact

Totalitarians come in so many different forms and the mutation rate is astounding. This is from Daniel Hannan in an article in The Telegraph in London on The greatest cultural victory of the Left has been to disregard the Nazi-Soviet Pact. There are so many cultural victories of this sort that it is hard to know which is the greatest or whether it is the facts they hide of the half truths they distort. Anyway, this is how Daniel begins:

Seventy-five years ago today [September 26], Red Army troops smashed into Poland. Masters of deception and propaganda, they encouraged locals to believe that they were coming to join the battle against Hitler, who had invaded two weeks’ earlier. But, within a day, the true nature of the Nazi-Soviet collaboration was exposed. . . .

It’s this lop-sidedness in our folk memory that we need to address. While Nazism is well understood as the monstrosity it was, there is often a lingering sense that Communism was well-intentioned, even though it went wrong. The merest connection with fascism bars a politician from office; yet those who actively supported the USSR are allowed to become ministers and European Commissioners. Wearing a Che Guevara tee-shirt is not regarded in the same light as wearing an Adolf Hitler tee-shirt; but it should be.

As the first of the comments noted, “It is a leftist myth that fascism and marxism are opposites. In reality they are both extreme leftist totalitarian rivals, while the opposite of both of them is free market libertarian capitalism.” A good deal of politics on the left revolves around my enemy’s enemy is my friend. Until the Soviet Union was attacked in 1941, the left found tooth and nail against the war. The enemy of the left are our free institutions and bourgeois values. That the carriers of the opposition are totalitarian crackpots is merely a detail that can be easily ignored.

An instructive thread on community opinion

The Australian has published an article whose main message can be read from this single paragraph:

In a good community, we can empathise with our neighbours. We can empathise with Muslim people in our community that they are in a difficult spot because of the actions of a small number of extremists.

The comments thread at the Catallaxy blog in response to this article may be read as representative of conservative opinion in Australia. This is not untypical:

The religion of Islam, it’s teachings , it’s followers are committed to some extent or other to displacing the infidels and their laws. According to Islam, this can be achieved by submission or by elimination. Islam wants imposition of sharia. Those are the facts.

Smiling friendly moslems aside, every moslem believes in this, whether they enable it or not. Your article above exhorts us to reach out to our would be conquerors. You may not realise it but we, the Christian West, are in a struggle to keep our way of life intact. The wars going on in the ME are the overt battles. The more important battle IMO is the one being waged right here – in the blogs and media of the West. For the hearts and minds of everyday people. Because it is us, voters, who will either allow Islam to grow in our midst or halt that cancer.

You have chosen to be with the appeasers. So be it. There are however those who won’t give in to the false comfort of appeasement, like me. Islam wants to take away my way of life. Islam wants us changed. The way I see it if enough Australians reject Islam here, that will be prevented. I reject Islam and this Govts capitulation in not naming this enemy in our society is vile. I wont be reaching out to Islam.

Read the entire thread. It is quite instructive.