Art Laffer receives Presidential Medal of Freedom

Both of the following links were found at Powerline: Trump Gives World’s Worst Economist the Presidential Medal of Freedom and Trump is giving Arthur Laffer the Presidential Medal of Freedom. Economists aren’t smiling.

These sour economic vandals. It’s not even that they are incapable of understanding what he says, but they are even unwilling to listen. The belief that economies are driven from the demand side is so inane that I find it hard to see how anyone with any sense can take it seriously. Everything about how an economy is driven forward and jobs created is dependent on individuals making decisions to do things, then working out what needs to be done and then doing it. No economy in history has ever slowed because there was an unwillingness to buy things. The idea is so stupid it is hard to imagine how it could ever happen in the world as we know it.

The core issue is Say’s Law. If you don’t understand Say’s Law, let me impress on you that you are incapable of understanding how an economy works. If you are interested, however, you can find out from my Free Market Economics, Third Edition, An Introduction for the General Reader. This is what Art Laffer himself wrote about the book, which you can find on the back cover of the text:

‘This book presents the very embodiment of supply-side economics. At its very core is the entrepreneur trying to work out what to do in a world of deep uncertainty in which the future cannot be known. Crucially, the book is entirely un-Keynesian, restoring Say’s Law to the centre of economic theory, with its focus on value-adding production as the source of demand. If you would like to understand how an economy actually works, this is one of the few places I know of where you can find out.’

The American economy is the only economy that has fully recovered from the effects of the stimulus which followed the GFC. It is also the only economy in the world that is managed largely by the supply-side principles, which is why PDT is giving Art Laffer this award.

Soak the poor

The astonishing part about modern macroeconomics is how those whose wealth is most comprehensively plundered through public spending and crony capitalism are the ones who are told that everything is being done on their behalf. Governments spend trillions hiring their friends and colleagues through moneys syphoned off from a proportion of the taxpaying public, but the reality is that everyone who is not on the receiving end is on the paying end, whether one pays taxes or not.

An economy during any relatively short period of time – say over the course of a decade – has only so many goods and services along with only so much physical capital. Those who receive payments from the government, whether public servants or government contractors, get to spend well beyond any productive contributions they make to the economy. Everyone else ends up with less.

It’s how Keynesian economics works. A massive Ponzi scheme, where the poor and middle class are made to subsidise the relatively well off as well as the rich.

You think you are getting free this and free that. But the ones who are creaming off the system are the ones the government is paying on your behalf. Even if you don’t pay a cent in tax, you are paying an enormous cost in allowing others to get rich while you struggle to get by.

And if you think it’s bad now, wait till Modern Monetary Theory becomes the go-to means to finance governments. And we are just one election away from a full roll out in Australia.

“Economic Theory ten years after the crisis”

That’s the title of the paper: Economic Theory ten years after the crisis, written by Droucopoulos Vassilis, Emeritus Professor of Industrial Economics in the Department of Economics at the University of Athens. There must be other such articles around, but this is one of the few I have come across. The abstract:

It is my intention to address, primarily within the scope of mainstream macroeconomic theory, three of the questions making up the main theme of the conference, namely: “How a very problematic theory continues to survive and dominate both the policy and the academic scene. What are the processes in the economy and the society that sustain its dominance? What is the condition of the economic Orthodoxy (particularly under its current form of the New Macroeconomic Consensus, that is the hybrid of mild neoliberalism with conservative New Keynesianism)?”. A good many orthodox economists hold the view that there is no necessity for a paradigm shift. On the contrary, a mere “evolution towards a more pluralistic discipline” would suffice. Hence the title of my talk.

They still don’t get it since variants of Keynesian economics remain as embedded as ever. But what a laugh to see New Keynesian economics described as “conservative”. It must be the modern fashion, and they wonder why nothing works.

So you will know when they lower rates that it was a serious economic mistake

From America, a conclusion which applies here with even more force than there since rates in the US have been rising: Trump’s Keynesian Monetary Policy.

The New York Times reported today on Trump’s advocacy of easy-money Keynesianism.

President Trump on Friday called on the Federal Reserve to cut interest rates and take additional steps to stimulate economic growth… On Friday, he escalated his previous critiques of the Fed by pressing for it to resume the type of stimulus campaign it undertook after the recession to jump-start economic growth. That program, known as quantitative easing, resulted in the Fed buying more than $4 trillion worth of Treasury bonds and mortgage-backed securities as a way to increase the supply of money in the financial system.

criticized these policies under Obama, over and over and over again….

Regardless of whether a politician is a Republican or a Democrat, I don’t like Keynesian fiscal policy and I don’t like Keynesian monetary policy.

Simply stated, the Keynesians are all about artificially boosting consumption, but sustainable growth is only possible with policies that boost production.

Why raising rates is good for production is to modern ears a complete conundrum. Think of this from The ABC:

The RBA concedes it is puzzled by the “tension” between strong jobs growth and a weak economy.

If the jobs data is right, then everything is OK and unemployment will fall, wages will rise and it will be high-fives back in the RBA’s Martin Place redoubt.

If GDP data is right and things are slowing — remember GDP grew at an annualised pace of just 1 per cent in the second half of last year — then a cut is order.

Absolutely incomprehensible to a modern economist is the absence of any relationship between the rate of growth and unemployment. Just as incomprehensible is the possibility that lowering interest rates from the low rates they are presently at might actually do harm and do no good whatsoever at all.

The great mystery is why they are so clueless

If you are wondering why you should never go to a mainstream economist to solve our economic problems, you should read through this: A Rare Prize for an Economist Looking at the Big Picture. That is, he has won the John Bates Prize awarded to economists under 40. “New” Keynesian Economics is not actually new; more like the far-left wing of modern macro.

Nakamura is one of the leaders in the field of New Keynesian economics. This school of thought, which has become the dominant paradigm at central banks around the world, holds that recessions happen because companies are unable to adjust their prices in response to events like a financial crisis or a big rise in interest rates. Without the ability to adjust prices, the theory goes, companies cut their output and lay off workers instead. In a 2008 paper with frequent co-author and husband Jon Steinsson, Nakamura showed that even very small amounts of this so-called price stickiness can generate large recessions, and make the economy very sensitive to changes in monetary policy.

“Not able to adjust their prices”? Surely they can put their prices down. Who would stop them? Surely they could raise their prices as well if they saw fit. But the problem is that at the prevailing prices and other prices as well, these firms cannot make a profit. As noted in the article:

Exactly why companies can’t adjust prices, however, remains something of a mystery. Nakamura’s research has helped to shed light on this question. Another 2008 paper with Steinsson helped to establish that price stickiness probably results from multiple factors.

The other word for it being a “mystery” is that they are “clueless”. I wonder if there are any lessons to be learned from the United States.

ENVY OF THE WORLD
UNEMPLOYMENT 49-YEAR LOW
WAGE HITS $27.77/HOUR
STOCK MARKET ENDLESS RALLY
TRUMP APPROVAL 50%

And speaking about clueless, think about the other 50% of Americans who do not approve of Donald Trump.

[My thanks to Nathan for sending me the news of the JB Clark medal.]

A thief walks into a store

Here is a question from Quora I have slightly changed which I leave for you to work out for yourself:

A thief walks into a store and steals $350. The thief then buys $350 worth of goods at the store. In the end, did the store lose any money and if so, how much?

To help you along, let me add in this quote from John Stuart Mill’s 1844 Essay, “Of the Influence of Production on Consumption”.

“The man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman’s fortune.”

I need hardly add that Mill thought he was being fantastically ironic. But there is then this, the third iteration.

A government who taxes you to the hilt but then spends the money it took from you on whatever the government chooses to buy, provides a benefit to you and everyone else since it adds to the level of demand and therefore helps maintain full employment.

This is modern economic theory and practice to the back teeth. In looking at this third iteration, bear in mind the money spent on all of the various unproductive forms of stimulus spending that occurred following the GFC.

[My thanks to Tony for bringing this Quora question to my attention.]

Keynes’s 1933 letter to Harlan McCracken

The letter you see I uncovered in 2008 in the Harlan Linneus McCracken Archive at Louisiana State University, which has now been published in the March 2019 issue of the Journal of the History of Economic Thought. It has already been published by me, but only in black and white. Here we see the letter as it actually is. If you would like to read more fully of the letter’s significance, you can go to:

Kates, Steven. 2008. “A Letter from Keynes to Harlan McCracken Dated 31st August 1933: Why the Standard Story on the Origins of the General Theory Needs to Be Rewritten.” History of Economics Review 47: 20–38.

The letter would be momentous were it not for the fact that it reveals that Keynes with certainty was reading other sources than those he had previously owned up to in writing The General Theory which he commenced writing in 1932 and which was finally published in 1936. The letter substantiates virtually beyond argument – there is always an argument – that Keynes took up the notion of demand deficiency because he had been reading Malthus at the time. Malthus had been the single most important economist to have argued for the importance of demand deficiency as a cause of recession and unemployment during the nineteenth century. Virtually every other economist at the time and through to 1936 thought Malthus was completely wrong. It was unanimously agreed among mainstream economists that the notion of demand deficiency was totally false.

Going further, it was from McCracken that Keynes took his definition of Say’s Law: “supply creates its own demand”. These words are found for the first time ever as a definition of Say’s Law in the very book Keynes is thanking McCracken for having sent to him and which he had “now read”.

The article the letter is attached to, and now published in the Journal of the History of Economic Thought, was written to demonstrates that “Say’s” Law not was invented by J.B. Say. No understanding of the classical meaning of Say’s Law can be found other than by going through the literature that followed the publication of Malthus’s Principles in 1820, not by reading Say’s Treatise, whose first edition was published in 1803. Moreover, “Say’s Law” was the name applied to this concept for the first time by Fred Taylor in the twentieth century. It was not a classical term. Keynes took the phrase “Say’s Law” from Taylor or from one of Taylor’s contemporaries. I am near enough the only person from whom this can be found out. Virtually no one else will even repeat it, and certainly no one is capable of refuting it since the term never shows up anywhere until it was coined by Taylor. Beyond that, no one ever said “supply creates its own demand” in relation to Say’s Law until it was said by McCracken.

You would not think there would be such a cover-up in something as esoteric as the History of Economic Thought, but the implications are explosive, the more so to the extent that others might begin to appreciate there is more in pre-Keynesian economic theory than anyone since 1936 has given it credit for.

Classical economic theory presents perennial truths that economists once knew but have completely forgotten

The perfect statement of classical economic theory, from David Uren in The Australian today: Get used to the new normal – booming rates of growth are gone.

Over the year to December, growth was only 2.3 per cent and, short of massive revisions by the Australian Bureau of Statistics, Treasury’s forecast of 2.7 per cent growth this financial year looks unattainable

It is time Treasury let go of its vision of an extended burst of rapid growth around the corner.

After a decade in the slow lane, this may be as good as it gets.

It is not such a bad place to be — employment growth has been strong.

It was a staple within classical economic theory that economic growth is unrelated to employment. And there we see it before our eyes, low rates of economic growth and high levels of employment growth. All that is discussed in my Quadrant article this month: The Dangerous Persistence of Keynesian Economics. There at the very end of the article we find the then-Treasurer of the UK, Winston Churchill, discussing the futility of public spending to add to employment in the wake of their attempt in the 1920s to stimulate employment through high levels of public works:

“For the purposes of curing unemployment the results have certainly been disappointing. They are, in fact, so meagre as to lend considerable colour to the orthodox Treasury doctrine which has been steadfastly held that, whatever might be the political or social advantages, very little additional employment and no permanent additional employment can in fact and as a general rule be created by State borrowing and State expenditure.”

Ninety years later we demonstrate once again what once upon a time every economist knew which now no one knows. Read the Quadrant article if for no other reason than to get another perspective.

The persistent failure of economic theory

I see the RBA today froze at the thought of raising rates in the midst of an economy as stone cold dead as this one. They are, of course, clueless about why this is, just as Treasury is equally clueless. So let me take you to my article just published at Quadrant on The Dangerous Persistence of Keynesian Economics. Here’s how it starts.

OUTSIDE the United States, no economy has fully recovered from the downturn that followed the Global Financial Crisis in 2008-09. The crisis came and went in half a year, but just about every economy continues to have problems generating growth, increasing employment and raising real incomes. As I was writing my article on “The Dangerous Return to Keynesian Economics” in 2009, I commenced working on an economic textbook, now in its third edition, to explain why modern macroeconomic theory is utterly useless, why no one using these economic models as a guide to policy would ever succeed. And here we are, ten years later, and everything discussed in that earlier article, explained in far more detail in my text, has come to pass.

________________

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

________________

Why did I get it so right? Because nearly everyone else thinks economies are made to grow through increases in demand, while in reality, as was once universally understood, economies can only be made to grow through improvements in supply-side conditions. Demand has absolutely nothing to do with making an economy grow. Demand of course is crucial to how many units of any particular good or service will sell, but has nothing whatsoever to do with how fast an economy in total will grow, or how many workers will be employed.

Does being right count for anything? Not a bit. Still, you can go back to my original article from ten years ago, The Dangerous Return to Keynesian Economics, and see how well what I said then stacks up with how things now are.

Let me add that if you are not already a subscriber, you should be. Subscribe here.

You heard it from me first

Here is what I have been writing about for years, finally confirmed: Low interest rates worldwide were killing productivity growth. Of course, this was from someone at the University of Chicago and not RMIT, so there’s a chance others might take it more seriously – although there is an even greater chance that they will pay no attention to any of it. Still, this is from the report picked up at Zero Hedge reprinted by Martin Hutchison from his website True Blue Will Never Stain.

The paper,“Low interest rates, market power and productivity growth” by Ernest Liu, Atif Mian and Amir Sufi, examines the behavior of firms in a competitive marketplace as interests decline, and demonstrates that, although lower interest rates at first increase competitiveness through increased investment, they also increase the comparative advantage of large firms, thus after a time discouraging the smaller firms from investing and making the market less competitive. If low interest rates persist and approach zero, eventually even the larger firms stop investing, because they are no longer subject to significant competition and thus do not need to invest.

The paper provides theoretical backing to and a possible mechanism for the observation set out in this column on several occasions in the last few years: that ultra-low interest rates in Japan, the Eurozone, Britain and the United States were closely correlated with unprecedented declines in the rate of productivity growth in those countries. In all the high-income industrial countries where interest rates were held artificially low after 2008, productivity growth by 2016 had effectively disappeared altogether, or close to it. The worst effects were seen in the eurozone and in Britain, where inflation continued, making real interest rates sharply negative. Even in Japan, where interest rates have been held artificially low for two decades, the productivity dearth worsened substantially after 2009.

All of this, including what follows below, can be found in much greater detail in the last two chapters of all editions of my Free Market Economics, and of course, in the third edition. If economic management and good economics is of interest to you, go to the link and read it all, but here are bits that you can also find in my text, embedded within the economic theory of the great classical economists. There you will also find a discussion of the natural rates of interest discusses in the article, along with my own diagrammatic explanation of what it is and how it matters.

Economies work best when interest rates are at or close to their natural level, that would be set in a free market. In a Gold Standard system with free banking, interest rates naturally stay close to that level. However, if as in modern economies governments have taken over the money creation and interest-rate-setting functions from the market and move rates a substantial distance from their natural level, then investment decisions become distorted and suboptimal. In such a situation, productivity growth will naturally decline; if the distortion of the interest rate curve is prolonged, productivity growth may even disappear as investments are made into entirely the wrong assets.

Not content with the damage they have already done, some extreme aficionados of low interest rates are devising schemes to drive them even lower, confiscating ordinary people’s cash holdings so that there was no longer any alternative to their diabolical financial schemes. Truly Ben Bernanke’s inspiration of 2002 to drop money from helicopters, uttered at a meeting of the National Economists Club at which I was present, has been among the most economically damaging ideas in all of history.

The article then goes on to discuss who has destroyed more value than the monetary theories advanced by Bernanke while he ran the Federal Reserve, we come to this.

Perhaps the most likely competitor to Bernanke’s contribution as a destroyer of economic value is Maynard Keynes’ “General Theory.” It unmoored us from the established truths such as the Gold Standard and balanced budgets and enabled greedy and unscrupulous politicians to waste ever more of our money in the name of “stimulus.” The California High Speed Rail scheme was just one $77 billion example of such folly; to misquote Oscar Wilde, a man would need a heart of stone not to laugh at its demise this week.

We do not yet know whether negative real interest rates or trillion-dollar budget deficits will be more ultimately destructive of our civilization, and Keynes, not Bernanke, is responsible for the latter. Unlike Marxism and like Bernankeism, Keynesianism has affected the entire planet; indeed, it seems irrefutable, the fallacy that will not die. However, Keynesianism’s effect on productivity is indirect; it merely grows government, a low-productivity activity, rather than destroying productivity directly.

I’m not going to get into an argument over who was worse, as long as we can agree that Keynesian theory has been a disaster (although I think he may have been more charitable to the growth potential of government activities in the modern world).

The point though, is that if you want an economic theory that will guide you in the right direction, no textbook – other than my own – written in the last eighty years will be of any help at all.