I am writing a paper on the disastrous turn in economic theory in which I explain that what is needed is a proper introduction of supply-side economic theory, which is really just classical economics with its modern name. Normally when I do this, I focus on John Stuart Mill since he finally brought it all together in his Principles, published 1848. Of late, I have also taken to using Henry Clay’s Economics: an Introduction for the General Reader which was published in 1916. There is such clarity there that I cannot believe how few of us there are anywhere who are even tuned into this stuff. But this time, partly just for a change, but also because he has more street creds even now, I have based my paper on Adam Smith and his Wealth of Nations. And what has amazed me is that it is all there, every last bit of it. The language is archaic, and being words without equations and numbers, few modern economists would make heads or tails of it. Too bad for us all, since this is what needs to be understood if we are ever to emerge from the mess our economies are in.

The reason I mention this is because of this news item at The Australian: OECD cuts forecasts, warns on growth. They are utterly bewildered, not just by how dead our economies are but by the refusal of governments to apply more of the same kinds of stimulus that created these problems in the first place.

The world’s economy is ensnared in weak growth and vulnerable to falling into another deep downturn unless governments take urgent action, the Organisation for Economic Cooperation and Development said on Wednesday.

Releasing its semiannual economic outlook, the Paris-based organisation amplified its call for governments to stimulate their economies by expanding investment and implementing policies that fuel competition, increase labour mobility and strengthen financial stability.

“The need is urgent,” OECD chief economist Catherine Mann said. “The longer the global economy remains in the low-growth trap, the more difficult it will be to break the negative feedback loops,” she added.

But there are signs of hope. Bad as our growth rates are – forecast 1.8% across the OECD! – no one any longer wants to take the same kinds of suicidal actions that created the problems in the first place.

The OECD called on governments in February to head off risks to the global economy by ramping up investment spending. The starker warning in the May economic outlook indicates little effective action has been taken and highlights the further dwindling of prospects for more sturdy growth.

In the most recent sign of reluctance among major economies to embark on fiscal stimulus, the Group of Seven leading industrialised nations stopped short of announcing coordinated action at a meeting last week. . . .

To lift the world’s gloomy economic prospects, the OECD laid the burden on governments rather than central banks because the room for expansionary monetary policies is reaching a limit.

They’re still Keynesians at the OECD in spite of everything. Such innocence, unfortunately combined with a deadly reluctance to investigate any other approach. I however completely agree with her about this:

“Policy-making is at an important juncture. Without comprehensive, coherent and collective action, disappointing and sluggish growth will persist,” Ms Mann said.

The dangerous part is that she has not a clue what the comprehensive, coherent and collective action needs to be.

Achieve recovery, that is. Because the overriding goal is to protect the status quo. At least he has noticed there is no doubt that the recovery programs have not worked. From Mike Campbell’s You won’t hear this anywhere which, oddly, is the case, except here, of course, but that doesn’t count. He doesn’t know why either, but at least he is willing to notice.

I’m afraid I have now come upon the definitive evidence that economists have no idea how an economy works. It’s from The Economist last month, it’s titled, “Money from Heaven”, but it is the subtitle that provides all the evidence that economic theory is lost in the forest and is unlikely to find its way out any time soon: To get out of a slump, the world’s central banks consider handing out cash.

“HELICOPTER money” sounds like an item on an expense claim at a hedge fund. In fact, it is shorthand for a daring [!!!] approach to monetary policy: printing money to fund government spending or to give people cash. Some central bankers seem to be preparing their whirlybirds (and their printing presses). In March Mario Draghi, the president of the European Central Bank, described helicopter money as a “very interesting concept”. Ardent supporters see it as a foolproof way to perk up slumping economies.

The notion has as much potential to drive recovery as the NBN or Building the Education Revolution. It continues to believe that public sector waste in the form of fake versions of productive investment (green energy, crony capitalist enterprises, rail and roads) will make an economy grow. No modern economics text so far as I know even discusses the notion of value added outside of the national accounts, which means economists grow up without knowing the single most important part of what causes growth. It is never part of the equation. Seriously, how could any self-respecting economist endorse this?

Advocates of helicopter money do not really intend to throw money out of aircraft. Broadly speaking, they argue for fiscal stimulus—in the form of government spending, tax cuts or direct payments to citizens—financed with newly printed money rather than through borrowing or taxation. QE qualifies, so long as the central bank buying the government bonds promises to hold them to maturity, with interest payments and principal remitted back to the government like most central-bank profits. (The central banks now buying government bonds insist they will sell them at some point.) Bolder versions of the strategy make the central bank’s largesse more explicit. It could, for instance, hand newly printed money directly to citizens. Jeremy Corbyn, leader of Britain’s Labour Party, has proposed “people’s QE” of this sort.

The advantages of helicopter money are clear. Unlike changes to interest rates, stimulus paid for by the central bank does not rely on increased borrowing to work. This reduces the risk that central banks help inflate new bubbles, and adds to their potency when crisis or uncertainty make the banking system unreliable. Fiscal stimulus financed by borrowing provides similar benefits, but these could be blunted if consumers think taxes must eventually go up to pay off the accumulated debts—a problem helicopter money flies around.

Haven’t these people ever heard of Venezuela? Do they really not understand that growth comes from value adding production and can come from nothing else. Do they not understand that for a project to be value adding, the value of what is produced must be greater than value of the resources used up. Loss making enterprises cannot cause growth. If this is really what economist think, economics is beyond a pseudo-science and into the region of crackpot.

The article is titled, Obama Presides Over the Feeblest Post-WWII Recovery which doesn’t even get to how bad it has been. Modern statistical tools aren’t up to it, but then neither is the theory. This is how the article ends:

Deep recessions have traditionally been followed by fast recoveries, but Obama broke this mold. In so doing, he proved once again that a combination of chaotic monetary policy, rising taxes, and suffocating government regulation is not a formula for prosperity.

Where is even mention of a problem associated with higher public spending? Not there because no matter where you start from as an economist today, public spending is a positive. And it’s not that monetary policy has been “chaotic”. Stability has been the watchword over the past seven years, rates kept down by Federal Reserve decree. It is that interest rates have been kept artificially very low but where do they teach how disastrous such a policy is? As for regulation, it’s bad but nothing particularly new. No doubt somewhat worse than a decade ago, and should be reversed, but regulation is not the central problem.

Here, however is a different explanation: The United States of Insolvency.

Crises and business cycles are always with us. I merely observe that sound money and a balanced budget were two sides of the coin of American prosperity.

Then came magical thinking. Maybe you had a taste of modern economics in school. If so, you probably learned that the federal budget needn’t be balanced–it’s nothing like a family budget, the teacher would say–and that gold is a barbarous relic. To manage the business cycle, the argument went, a government must have the flexibility to print money, to muscle around interest rates and to spend more than it takes in–in short, to “stimulate.”

Oh, we have stimulated. Between the fiscal years 2008 and 2012 alone, federal deficits totaled $5.6 trillion. The public debt nearly doubled in the same span of years, to $11.2 trillion. The Federal Reserve tickled $1.6 trillion in new digital dollars into existence. True, our Great Recession proved no Great Depression, but the post-2008 recovery is the limpest on record.

It’s not, however, the debt per se. It is that government spending is never value adding. We teach that debt doesn’t matter and public spending is a stimulus. Keynes can truly say as we look across the world’s economies: “si monumentum requiris, circumspice“.

ADDING A BIT MORE: There’s probably not a day that goes by that I am not reminded of how disastrous Keynesian theory has been. There is nothing wrong in principle with doing things that will reduce unemployment and get recovery going. But there is a very great deal wrong in practice with public spending as the vehicle. So we can add this from today:

Middle class takes hit in most cities…
Incomes have fallen in four-fifths of all metro areas…
New American Home: Multi-Generational Living on Rise…

The ridiculous notion that we are falling into some kind of deflationary trap is being promoted because if you are a Keynesian you have virtually nothing else to say since you cannot blame it on the policies you believe must work.