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What if Keynesian macro really is junk science?

August 3, 2016

You heard it here first, and since then you have heard it often. The “stimulus” will slow recovery and artificially low interest rates will only make things worse. Since none of this will be explained to you in almost any economics text written anywhere in the past 80 years, it is hard to work out why all this spending and low rates seems to have done nothing of value. But at least there is now some recognition that things are not working out. First this from CBS in the US [!]: Let’s face it — the U.S. economy is going nowhere fast.

They are two of the scariest words in the English language, often heard as the engine room is starting to flood or the parachute fails to deploy: “Don’t panic.” And that was the message among economists trying to make sense of how it is, exactly, that the U.S. could be slowing, when most forecasters had expected it to be speeding up by now.

Time to lower the lifeboats? Not quite. But the economic seas are starting to look ominously rough. Let’s consider why the situation is worrying.

First, it is clear that the economy is much weaker than we thought. As Deutsche Bank economists note, over the past four quarters the non-consumer portion of the economy, notably businesses (you know, the ones that hire people), has grown at a rate of -0.2 percent. That’s recession territory.

A number of economists are now also ratcheting back their forecasts for full-year growth to less than 2 percent, or what many experts think is the economy’s “stall speed.”

Second, history shows that a downturn that starts on the “production” side of the economy [which is where they all start], such as business investment, almost always ends in tears for consumers. Economist Charles Gave of investment advisory firm Gavekal notes that only once since 1958 (in 2012) has the non-consumer part of the economy contracted without that period later being understood to have been part of an official recession.

Meanwhile, here in Australia:

The RBA moved amid worries that there was too much idle ­capacity in business and the labour market, leading to very low inflation and the weakest wage growth on record.

“Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” bank governor Glenn Stevens said after yesterday’s meeting.

Keynesian macro is junk science but if you are in government doling out the spending, nothing could be nicer. I have just finished a paper to be delivered at the start of next month which is a critique of modern macro from a classical economic perspective. It never fails to astonish me how the economics of John Stuart Mill and Henry Clay lay everything open, while the Keynes-Samuelson aggregate demand story has never worked on a single occasion.

A BIT OF ADDED COMMON SENSE: I don’t know how such a sensible article ended up on The Conversation, but there you are. It is Phil Lewis discussing Is the concept of ‘helicopter money’ set for a resurgence? It no doubt is since there is a never-ending supply of bad ideas to try before you actually have to do something hard that works. This is from his article:

The various “stimuluses” have been going on now for eight years with little or no discernible effect on economic growth [At least no discernible positive effect – SK]. This is hardly surprising given that growth entails adding value to inputs to produce goods and services people want at prices they are willing to pay.

Value adding is best done by the private sector and cannot arise from wasteful government expenditure, accumulating debt or printing money. Growth (and jobs) can only arise from value adding activities and government policies which facilitate this such as reducing debt, promoting free trade, reducing restrictions on business and labour market reform.

This is hard to do and far more difficult than easy options such as printing money, which explains why neither side of politics appears to have the stomach for real reform.

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