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.

I am back in Australia in the technical sense that I may be found at the Chinese Economic Society Australia meeting in Cairns but it was a long flight from Las Vegas, most of which was spent reading Donald Trump’s The Art of the Deal. More on that later but let me tell you about CESA and my presentation. Although I presented the paper at Freedomfest, with its focus on the failure of Austrians to take on Keynesians with all the venom they deserve, the paper was written for the Chinese who have become interested in supply-side economics. Although Keynes remains dominant in China, as he is everywhere (and you are kidding yourself if you think he’s not), the Chinese are interested in alternatives, with supply-side economics their own specific area of interest. And as I argue, you cannot find a supply-side model outside the classical economics of John Stuart Mill and Henry Clay. Here’s the list of modern schools, in a highly aggregated way:

Classical
Marxist/socialist
Keynesian (which includes monetarists)
New Classical
Austrian

Only classical specifically incorporates all of the elements needed for clarity in economic thought: the entrepreneur, value adding as the core concept, Say’s Law, a complete rejection of demand as a macro variable, and a theory of recession based on disorder within the structure of production. And I have to tell you that I have had one of the best receptions to a presentation of mine ever. I should also add that my presentation in Las Vegas was attended by the great George Gilder, co-inventor of supply-side economics with Art Laffer during the Reagan Revolution. We need to do it again, but interestingly it seems as if the Chinese are now way ahead of the game.

I’m here at Freedomfest which is the annual meeting place in the United States for all of the political groups on the right. I am part of that strand of conservatives which is well represented but is hardly even a plurality. My paper, however, is about an issue that I think of as extremely important, have raised it often but never really received an answer that satisfies. And the issue is why do Austrians virtually never take on Keynesian economics. This was as much as admitted by Israel Kirzner in his brilliant biography, Ludwig von Mises (ISI Books, 2001: 160).

Ludwig von Mises adopted a vigorously dissenting stance towards this Keynesian economics. Although he rarely offered frontal rebuttal to Keynesian theory, his contributions to the topic dealt with in this chapter constituted a well-developed (if implicit) basis for his rejection of Keynesianism.

My argument is that it is only classical economists who had crafted their theories to deal with Keynes since it was they who had fought off Malthus and demand deficiency during the general glut debates of the 1820s, whereas Austrian theory had been designed to refute Marxist theory but also was itself constructed on a demand-side focus based on marginal utility. And while Marxism has not gone away, the crucial battles in our time deal with the Keynesian theory of deficient aggregate demand.

I have been at an economics conference today which brings the following to mind. I tend to hang out among economists who want to see the end of the basic “neo-classical synthesis” approach to the way we teach economics, which is something I dearly wish for myself. But unlike the others, I find the combination of Keynesian macro and marginal micro so poisonous to clear economic thought that my aim is to see economics move back towards the theoretical approach of the great classical economists who you can find from the publication of John Stuart Mill’s Principles of Political Economy in 1848 through to Henry Clay’s Economics in 1916.

But for those I’ve been dealing with, today’s mainstream isn’t radically left wing enough and are continuously looking to replace what we have with some kind of far-left monstrosity.

I have therefore begun to ask the question, what is there in the way you would teach economics that would assist the government of Venezuela to understand what has gone wrong in their economy? You know, they have no answer. They don’t even try to explain what great insights they have or would offer. We are in dangerous times in so many ways, and this loss of economic understanding about what makes an economy work is not anywhere near the bottom of our list of problems.