Economic policy for idiots

Here’s a misleading headline: Interest rate cuts causing pain for no substantial gain. The reality is that interest rate cuts have done substantial harm to the economy, but at least people are beginning to see just how harmful these cuts have been.

The letter challenges the central bank’s strategy as it struggles to meet its inflation target and follows a groundswell of disquiet with the direction of monetary policy — including from former treasurer Peter Costelloformer RBA governor Ian Macfarlane and a trio of Liberal backbenchers.

The cuts have also sparked alarm for reigniting house prices in Sydney and Melbourne without boosting economic growth, or household or business confidence.

Mr Costello — Nine chairman — said record low interest rates and tax cuts had failed to stimulate consumer spending, which had hit advertising spending.

It’s this modern macroeconomic junk science that never ever gets anything right. I will again mention my Free Market Economics, Third Edition An Introduction for the General Reader where in its final two chapters sets out the flaws in Keynesian monetary policy as clear as you might like. Keynesian economics has evolved into the modern form of socialism, giving blanket approval to public spending, massive deficits and incompetent monetary policy. Think how incredible it is that the approaches taken to fix the Global Financial Crisis have never worked in a single instance in any country in the world. For an abbreviated version of all of this see The Dangerous Persistence of Keynesian Economics which begins with these two quotes:

Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.
What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.
—Steven Kates, Quadrant, March 2009
Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?
—Question to Steven Kates from Senator Doug Cameron, Senate Economic References Committee, September 21, 2009

Great question. For the answer see my text. I might also mention that I have just sent off to the publisher my “Classical Economics for the Modern Economy” but that won’t be around till next year. But these central bankers and Treasury economists do only harm every time they touch the economy. And just for the record, infrastructure spending, beyond a minimum – and we are well beyond that minimum – will only make things worse.

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