May you live in idiotic times

You want socialism we’ll give you socialism. This is the front page of The Oz this morning: DEPRESSION BUSTER with the headline all in caps just as you see. We are going to keep handing out money to people for not working and let them stay at home. Maybe this is what people really have always wanted. I wrote my own post last night but didn’t put it up and I, too, used caps, just like this. Here is my take on where we’re off to from last night. It was addressed to the Prime Minister.


If I hadn’t just listened to Steve Conroy present the Labor side of things on Andrew Bolt, I would not have known that they are even more absurd than you and your national cabinet. But I don’t really blame you since you are an economic simpleton. I blame those buffoons in Treasury who are giving you and your Treasurer this advice. They are your enemies. They are incompetent. Don’t you know that?

The important part of what first needed to happen was to ensure that no one runs out of purchasing power, which means that no one runs out of MONEY. This was not supposed to be an endless supply of cash unbacked by any productive activities. It was only supposed to be a stop-gap of a week or two and only for those who have been caught short of cash to spend.

If you think this kind of funding of unproductive activity can go on for even a couple of months, never mind six, you will go down in history as WORSE THAN WHITLAM.

I understand that such considerations have gone out of fashion, and are never mentioned in an economics text, but have you ever heard of this thing called the private sector? Do you understand the conception surrounding the notion of value added? If you do not do as much as possible to ensure that incomes are related to productivity, you are guaranteed to run the Australian economy off the rails. You will make the Liberal Party poison for a generation if not longer.

I am perfectly aware that governments skim billions that have been earned through actual value-adding work through taxation and other forms of revenue acquisition. I am just as aware that these tens of billions you gather in are spent on producing assets that never have a positive return on funds invested. The NBN, the train lines in Melbourne or the streetcars in Sydney are a sinkhole of loss that must be covered by actual value-adding projects in the private sector. The ratio of wages paid to value produced in the public sector is a massive negative. You guys have never managed a payroll in your lives which shows in almost every economic decision you make.

But to take these stupidities and extend them even farther is gross negligence. To fund the economy’s wages bill while you have shut down productive activity all across the continent is nuts.

We have eighteen dead from the Corona Virus. People are getting sick, and anyone of us, particularly our older citizens, might end up with this disease and some may die. But to crash and burn an economy because there might eventually be a few thousand of us caught up in this medical firestorm is so bizarrely disproportionate as to defy belief. Have you no sense?

Say you are doing everything you can to overcome this virus, and then do everything you can. There are cures coming, vaccines being developed to prevent its spread, forms of isolation and treatment on the way that will limit how much further the disease continues. Common sense ought to be the prime prerequisite for a Prime Minister. That is why we elected you, to make difficult decisions. People will die from the Corona Virus, that is a certainty. They will also die from incompetent economic decisions.

You must open the economy up as much as possible and do it as soon as possible. Everyone now knows they need to be careful of what they do. Everyone is aware of what they must keep an eye out for. But if you do not let us get back to work, you may ultimately be held responsible for the greatest economic disaster in Australian history.

Anyway, we shall see. We have become the stationary state that John Stuart Mill used to discuss and even looked forward to. All that for a subsequent post.

First they clock you on the head, then they revive you and call it a “stimulus”

Economic theory is confused almost to nullity. Part of my Classical Economic Theory and the Modern Economy (available from June) is a detailed discussion how modern economics, particularly the macroeconomic side, has made it almost impossible to talk about economies in a way that makes sense because of the terms we now use. This latest proliferation of the term “stimulus” to refer to the efforts to minimise the harm inflicted on our economies by closing them down is an example that had not even occurred to me. It will now make its way into the final text. Here’s the definition of economic stimulus from the net:

 An economic stimulus is the use of monetary or fiscal policy changes to kick-start growth during a recession. Governments can accomplish this by using tactics such as lowering interest rates, increasing government spending, and quantitative easing, to name a few.

Whatever you might call what is being now done, it is not a “stimulus”. Even economists can no longer distinguish the present attempts to minimise the structural damage caused by government restrictions on the economy with an attempt to “kick start growth”. The plain fact is that they have no idea what they are doing although for a change they are doing the right thing.

But here is how it will have to end in about three months time when the Corona Virus is finally declared under control. They will have to raise interest rates a couple of percentage points to pull all of this money out of the system. It won’t take much of an increase but that will be crucial.

In the meantime they should cut wages among the non-essential members of the public sector by 20% at a minimum. I would do it on a permanent basis, but do it at least temporarily until the emergency is over.

Is it really that hard to understand that unproductive public spending lowers productivity?

Is there anyone anywhere who actually believes that the present recovery in the US has anything to do with Obama? Actually there are lots of people just as ignorant as that, amongst whom is Obama himself. I get the same level of irritation when I read how economic “managers” here in Oz wonder why productivity growth is so pathetic and real wages are falling even as they see before their eyes the construction of streetcars in Sydney, trains in Melbourne and the diversion of tens of billions of dollars into preventing a non-heating planet from heating. Anyway, this is Trump v Obama on why the American economy has been rising since Obama left the presidency.

President Trump fired back Monday after former President Barack Obama, in a subtle swipe at the commander in chief, claimed credit for the economic gains in both their terms.

Obama tweeted Monday morning to note the anniversary of his signing the 2009 economic stimulus package.

“Eleven years ago today, near the bottom of the worst recession in generations, I signed the Recovery Act, paving the way for more than a decade of economic growth and the longest streak of job creation in American history,” Obama tweeted, alongside a photo of his signature on the bill.

But, the Trump campaign, in a statement to Fox News, countered that the economy was recovering only because of the actions Trump took to undo his predecessor’s policies.

“President Trump reversed every single failed Obama-era economic policy, and with it, reversed the floundering Obama/Biden economy,” Trump campaign national press secretary Kayleigh McEnany said. “Obama and Biden orchestrated the worst economic recovery in modern history.”

Actually, everyone else did more or less the same as Obama, Australia included, with more or less the same results. Modern macro is about as disastrous as a policy can be, although we may yet see Modern Monetary Theory given a try by one of the socialists now running for President as a Democrat.

The best first year ever!

This is a government with a policy matrix from the days of my youth those many years ago. Socialist rot has overtaken even the American Republic, but you are seeing policy that is once again dependent on individuals taking their own lives into their own hands and getting on with it. There are still enough socialists around, and in some very influential places, to cloud the issues, but the message is getting through. The desperation Democrats must feel seeing just how well social policies based on free markets and strong borders work is evident at every turn. Their only hope is that these policies fail, but so far there is no evidence that they have. PDT will still need his share of good luck, but the evidence of the dividends from good policy are visible at every turn.

So to help you keep in mind how well things are going, which you will never hear from the mainstream media and the left, this is a reminder from Gateway Pundit: HERE IT IS=> Complete List of President Trump’s Historic Accomplishments His First Year in Office!.

President Donald J. Trump had arguably the best first year for any President in US history since Washington – in spite of massive headwinds from the actions of the corrupt and criminal prior administration, the Democrat Party and their MSM! Below is a list of his major accomplishments.

President Trump was inaugurated on January 20th, 2017, one year ago.  Since then his accomplishments are nothing short of miraculous.  In spite of massive attacks from the MSM, an investigation created through the efforts of the prior corrupt administration, and a Democrat Party that does all they can to derail him, the President kept his promises and did all he could to Make America Great Again.  The results speak for themselves.

The Economy –

The US stock market is a barometer of economic activity and since President Trump was elected President it has skyrocketed.

The stock market on Wednesday, January 17th, 2018, this past week, says it all. On that day the Dow broke 26,000 points for the first time in its history.  As a result the Dow broke the record for the fastest 500, 1,000, 2,000, 3,000, 4,000, 5,000, 6,000 and 7,000 point increases between major milestones in the history of the Dow. All of these increases occurred since Donald Trump was elected President.

The Dow today stands at 26,071.7.  It is up 42% since the 2016 election and 31% since last year’s inauguration.  The Dow had more all-time closing highs in 2017 than any year in history.  President Trump enjoys 95 all-time highs since his election and 78 since his inauguration.  The Dow is up an amazing 7,739 points since the election.

Americans of all walks of life are seeing their 401k’s explode because of President Trump.

Today there are more people working than at any time in US history. More than 2 million new jobs were created in 2017 under President Trump and as a result more than 160 million people are working in the US today.

President Trump increased the GDP growth rate to above 3% in the 2nd and 3rd Quarters and the 4th Quarter was sizzling.  President Trump could reach a 3% GDP growth rate his first year in office, an annual GDP that the US hasn’t seen in a decade.  At the end of the 3rd Quarter the national GDP reached $19.5 trillion for the highest recorded GDP in US history.

The President’s tax plan passed in late December and is already benefiting Americans and American companies. Employees will see increases in their pay next month due to the lower Federal taxes.  Millions of Americans have received bonuses due to the tax cuts and major companies have announced plans to move capital and operations to the US due to these cuts.  The benefits of these cuts haven’t even transpired yet but the excitement amongst workers and companies is electric.  2018 is poised to have one of the greatest economies in US history!

Foreign Policy

President Trump vowed to destroy ISIS. Despite President Obama saying that ISIS will be around for a generation, these murderers and terrorists in the Middle East were decimated over the past year.  Both Syria and Iraq have declared victory over ISIS and due to President Trump’s resolve, less than 1,000 ISIS fighters are estimated remaining.

President Trump met with the Pope, leaders of 50 Muslim countries and Israeli and European leaders in his first trip abroad. He demanded that the Muslim leaders remove radicals from their countries.

The President refused sending Pakistan security assistance in the millions due to the Pakistani’s harboring terrorists.  He stopped an Obama last minute $221 million transfer to Palestine and cut aid to Palestinians in half.  He showed that the US is unwilling to work with Muslim entities that support radical Islam.

On President Trump’s successful trip to Asia he bundled an estimated $300 billion in deals for the US. He met with Asian leaders and was the first US President and foreign leader to dine in China’s Forbidden City since the founding of modern China.

US Policy

The President named and successfully put in place a new Supreme Court Justice, Neil Gorsuch He signed more than 90 executive actions in his first 100 days alone.  The actions included –

* Dismantling Obama’s climate change initiatives.
* Travel bans for individuals from a select number of countries embroiled in terrorist atrocities.
* Enforcing regulatory reform.
* Protecting Law enforcement.
* Mandating for every new regulation to eliminate two.
* Defeating ISIS.
* Rebuilding the military.
* Building a border wall.
* Cutting funding for sanctuary cities.
* Approving Keystone and Dakota pipelines.
* Reducing regulations on manufacturers.
* Placing a hiring freeze on federal employees.
* Exiting the US from the TPP.

The list of POTUS 45’s successes goes on and on.

Undoubtedly there is more to do. The wall is not yet in place and Democrats are willing to shut down the government and stop providing money to our troops so that illegals are given citizenship.  The FBI and DOJ are headed by Obama leftovers who are involved in corrupt and criminal activities.  A bogus investigation was created by these scoundrels and the current AG who recused himself from anything Russia appears to be inept and sleeping.  But based on President Trump’s performance to date, he will address these issues successfully in due time as well.

Overall President Trump’s first year in office was outstanding. He was attacked from all sides at times and stood tall and to his principles.  America is stronger and greater than ever before.  The economy is growing and the world is safer.  2017 was certainly one of the greatest years in US history.  President Trump kept his promises and has truly Made America Great Again!

Donald Trump and economic policy

Just received this very nice note so thought I would say something about the question asked. Here is the note:

I enjoy reading your contributions to Catallaxy on a regular basis. I can’t say I know a lot about economics, but I especially like hearing you arguments to current economic theory. Rational debate is a powerful tool.

Recently, I was at work and a conversation around the lunch room turned to America politics.

Most of my work colleagues are “Never Trumpers”, but when I pointed out the American economy was currently doing very well, with record high stocks and decade low unemployment, one of my colleagues said something thatade me questions Donald Trump’s success. The comment was…

“The current economic success in American has nothing to do with Donald Trump. It wouldn’t matter who was President at the moment. The economy just goes through natural peaks and troughs in a capitalist society.”..

Knowing that the President has now been in place 12 months, and knowing that the Republicans still have not released their tax plan, is the above statement true?

Nothing like magical thinking to make you believe in the tooth fairy.

The parlous state that Obama left the American economy in will require an astonishing amount of luck combined with a great deal of very well constructed policy to move past. You do know that in the entire eight years Obama was president, the US economy on not a singe occasion achieved a growth rate as high as 3%. Trump has now achieved it twice, with more to come. Obama even inherited the recovery phase following the GFC which is almost invariably an economy’s period of strongest growth since part of what happens is the recovery of ground lost during the recession. Instead, there were eight years of low growth and stagnant employment. There is not an economic story to tell to his credit, even with interest rates at near zero and public spending at an all-time high, which in standard economic theory are a good thing. Of course, both are harmful to an economy’s prospects but don’t expect your friend to know it or believe it if you tell him.

But why take my word for it. Here is Conrad Black pointing out that Trump is already the most successful U.S. president since Ronald Reagan. And as you can see from the beginning of this excerpt he is not PDT’s greatest admirer, but even so:

He can be a tiresome and implausible public figure at times, and the reservations widely held about him, in the United States and elsewhere, are understandable and not unfounded. He is, however, the most effective U.S. president since Reagan. In the 20 pre-Trump years there [occurred] the greatest world economic crisis since the 1930s, American GDP per capita growth and capital investment shrunk by 75 per cent, the work force lost over 15 million people, millions of unskilled, illegal migrants were admitted, and the national debt of 233 years of American independence more than doubled in the last seven years of Obama. Those 20 years were the only time of absolute decline in American history, as well as a period of prolonged economic stagnation. Americans, unlike the older great nations of Europe and the Far East, have never experienced such setbacks and stagnation, and don’t like or accept them. It was in these circumstances that this unusual president was elected.

In addition to these American problems, there is the international phenomenon of ever-widening disparity of wealth and income, with no obvious solution — taking money from people who have earned it and giving it to those who haven’t will just drive out the high economic achievers who provide most of the personal income tax revenue already. And there is the problem that, for the first time, higher technology produces unemployment rather than employment, and increased productivity, unlike in the Reagan years, has not, until Trump was elected, led to job creation.

There is more at the link than just the economy but here we will stick to the economic issues.

The political business cycle works like this. The left elects a typically economically ignorant numbskull (voted in by people such as your colleague at work) who think markets don’t matter and public spending plus socialist rhetoric plus charisma are all that is required. The result is economic damage that goes on until finally enough of the socialists in our midst finally decide to get rid of these incompetents and bring in someone who knows what they are doing. Very old story. Whitlam in the 1970s gave way to Fraser, Rudd-Gillard in the 2000s was replaced by Abbott, Jimmy Carter replaced by Reagan, Labour in the UK followed by Thatcher etc. The return to market principles lasts just long enough before another adventure in socialist central direction, which is why we can never rid ourselves of bad economic policy (imagine voting out Howard-Costello for Rudd-Swan!). Most of the time, socialists wreck things followed by conservatives who fix things up (and it is weird that Shorten is being looked at as a better economic manager than Turnbull). Your mate is one of those who cannot bear to recognise that anti-market policies never work and just getting rid of them does work. Had Hillary been elected, the certainty is that no recovery of any kind would have been visible nor probably have ever occurred. Ignorance of the necessities of market-based policies is the rule on the left, and only deep deep pain for a large number of people for a considerable period of time finally get them to turn around. Venezuelans may just be there now, but the entire country invited the problems it has and the cure, if they ever get around to one, will be short-lived because the world is filled with people who believe strong economies are like good weather, just part of the nature of things, and into every economy a bit of rain must fall, etc etc. You won’t convince him, but at least you can see it for yourself.

I will discuss international trade and free markets some other time. In the meantime, here are a few specifics of what Trump has done and is doing from a previous post:

• reducing public spending
• rolling back regulations
• cuts to taxation – business and personal
• interest rate increases although limited
• more room provided for entrepreneurial decision making
• crony-capitalism [Keynesian theory] no longer at the centre of policy

Nothing you can do to convince such people, but it isn’t bad luck that causes leftist governments to wreck things but bad policies. They can’t help it, but at least we can do something by not electing them in the first place.

AND WHILE WE’RE AT IT: Don’t be misled by the title: Why I Have Given Up on Trumpism. Here’s his point but feel free to read it all:

“But just think about these subjects: illegal immigration (down by more the 60 percent), energy (America is now the world’s biggest producer of energy), unemployment (4 and a bit percent), growth (3 percent for two quarters running), the market (up more than 5,000 points since November 2016), regulation (huge progress in turning back the counterproductive regulatory environment that has stymied American business), consumer confidence (the highest it’s been in a generation), the military (revitalized), taxes (a bracing if imperfect plan wending its way through Congress), Iran (declining to recertify a deal that paved the way for Iran to become a nuclear power). Et, need I say, cetera.”

For the #NeverTrumps and the #NoTrumps you waste your breath in saying anything at all. But this is what I say. You may not have preferred PDT to some other as many did. But if you are still banging on about Trump and where he might lead us, rather than starting to think he might in the end be all right, you are simply a partisan fool, utterly clueless about policy, and have no business even pretending you are on the right side of politics.

Does this include classical economists

Statement of the AEA Executive Committee
October 20, 2017

To: Members of the American Economic Association
From: Peter L. Rousseau, Secretary-Treasurer
Subject: Statement of the AEA Executive Committee

Many members of the economics community have expressed concern about offensive behavior within our profession that demeans individuals or groups of individuals. The American Economic Association strongly condemns misogyny, racism, homophobia, antisemitism and other behaviors that harm our profession.

AEA President Alvin E. Roth has charged an ad hoc committee on professional conduct to formulate a set of guidelines for economists to be considered by the Executive Committee. The ad hoc committee is charged with evaluating various aspects of professional conduct, including those which stifle diversity in Economics. It will submit a report in time for discussion in January. There will be a period for comment by the AEA membership on that report following its release.

The Association is also exploring the possibility of creating a website/message board designed to provide additional information and transparency to the job market for new Ph.D.s, and will be surveying departments to assess what information about their search processes might be shared.

And coincidentally, this also arrived at the same time from Human Progress. There we find:

Zakaria eloquently summarizes some of the problems with Western development professionals and their organisations. In particular, she says, their top-down approach to development, with its narrative of heroic humanitarians bestowing charity upon the world’s poorest women, is profoundly condescending. “Non-Western women are reduced to mute, passive subjects awaiting rescue,” Zakaria writes.

Patronizing attitudes aside, development professionals are also largely ineffective at alleviating poverty. The feel-good programs that give chickens to poor women, for example, don’t lead to any long-term economic gains.

These criticisms have been made before. New York University’s William Easterly has documented in great detail how the top-down “technocratic” approach to development often serves only to enrich “expert” development professionals and dictators in poor countries.

The natural rate of economic ignorance

Having taught modern policy just this week, about inflation targeting and the natural rate of interest, and again while doing it wondering whether such gross stupidity can still persist when it has caused nothing but grief, it was nice to see this in The Australian today, by David Uren, that all is still wrong with the world and economics remains stuck in the same rut it’s been in for thirty years. This is from his article, Stubbornly low inflation tests even RBA’s patience:

When Philip Lowe took up the governorship of the Reserve Bank of Australia a year ago, financial markets were betting he would be cutting rates within six months. Today they are betting he’ll be raising them by May next year.

After Tuesday’s RBA board meeting, Lowe said there would be no change in rates, as he has after every meeting since his first as governor in October last year. . . .

It is as if the economy were stuck in first gear, and the Reserve Bank keeping its foot to the floor is neither making it go any faster nor lifting inflation. Central banking the world over is in ferment as top officials wrestle with the risks created by a decade of ultra-low rates and with their failure to generate the modest inflation required by their formal targets.

The inflation targeting framework that has governed the world of central banking for the past two decades, and that seemed to work so well at taming runaway inflation, is now struggling to deal with price rises chronically undershooting the mandated goals.

The Reserve Bank has been pursuing a target of keeping inflation between 2 per cent and 3 per cent since the early 1990s. The underlying rate of inflation (which strips out volatile movements such as petrol price jumps) has been below 2 per cent since the beginning of last year and the RBA’s projections suggest it doesn’t ­expect a ­return to the desired 2.5 per cent until the middle of the next decade. The same is true the world over, and it is leading central bankers to question whether their explanation of the economy and their impact on it is correct.

In a speech last week, US Federal ­Reserve chairwoman Janet Yellen pondered whether there was a “risk that our framework for understanding inflation dynamics could be misspecified in some fundamental way”. A week earlier, Bank of England governor Mark Carney had claimed globalisation was responsible for weak inflation but said he was not ready to ditch his bank’s inflation target.

The Bank for International Settlements, which is a kind of central bank to the world’s central banks, warns that the inflation targeting framework is fostering a dangerous build-up of risk. Head of its monetary and economic ­department Claudio Borio says central banks must “feel like they have stepped through a mirror”. Having spent their lives struggling to bring inflation down, they now toil to push it up. Where once they feared wage increases, now they urge them on.

Borio challenges the intellectual underpinnings of central banking. For the past century it has been assumed that there is a “natural” (or “neutral”) rate of ­interest that balances the needs of savers and investors. If a central bank sets its policy interest rate below this natural rate, it will ­encourage people to run down their savings and lift spending, pushing inflation higher. If the policy rate is higher than the natural rate, people will save more of their income to take advantage of the higher rates, spending less, and inflation will fall.

The theory runs that while central banks set the short-term rate of interest, long-term bond rates trend ­towards the “natural rate”. But this natural rate of interest is an economists’ hypothesis — it can’t be seen or measured, except by economists’ models. Borio calls it an “abstract, unobservable, model-dependent concept”.

Low interest rates are one of economic theory’s worst ideas ever, a notion once universally understood by all and now understood by none. Economic theory will have to relearn the lessons of the nineteenth century. It is quite quite astonishing to see these errors compound and the undoing of this mess won’t be pleasant. So to the article’s end:

The RBA slashed its cash rate from 4.75 per cent to 1.5 per cent between late 2011 and late last year, triggering a house price boom that pushed up household debts by an average of almost 7 per cent a year.

This week the International Monetary Fund said household debts much above 60 per cent of GDP were a threat to growth and financial stability. The RBA’s measure of the household balance sheet shows debts have soared from 120 per cent of GDP to 137 per cent since 2011, putting them among the highest in the world.

Lowe worries that a small shock could turn into a much lar­ger downturn as households seek to repair their balance sheets. The danger is that debts are already so high that any rise in rates would crunch household spending, while rates are still low enough to make further borrowing attractive. With no path forward, the Reserve Bank is stuck where it is.

As for the theory that explains it all, you could go to Keynes, not The General Theory where he abandoned it all, but to his very orthodox 1930 Treatise on Money where he discussed the natural rate of interest in just the way it had been discussed since the end of the nineteenth century. Or you could go to the last two chapters of my Free Market Economics, whether editions one, two or three, since it is the same message in each.

Look Joe, let me put it this way

Managing an economy is not easy but there is one single simple principle that should guide those who make policy. The only policies that will work are those that make an entrepreneur more willing to invest and employ. Everything else is nonsense and irrelevant. You must do things that make employers more willing to employ and investors more willing to invest.

Where are such policies? Name a single change that has been brought on through economic policy that has made life easier for an entrepreneur, for those who run businesses. If you listen to those characters in Treasury who were brought up on C+I+G and don’t know any better, you will continue to manipulate the level of aggregate demand or fiddle with interest rates. These are more than useless; they are actually harmful. They make you worse off.

Here’s what to do. Invent in your mind a representative entrepreneur. Conceptualise someone running a business of any size with employees of any number. Then try to work out the kinds of conditions that would have to change if they are to increase production. And if you think what they need is an increase in demand, you have already failed the test since an increase in demand can only follow from an increase in value adding production.

Here’s the program.

You must cut business taxes, not personal taxes, or at least not yet.

You must diminish the regulatory burden on business.

You must minimise union interference in business decision making.

You must allow labour costs to adjust to the existing level of business productivity.

You must reduce government spending since such spending only competes with business for the community’s small stock of savings.

You must balance the budget as a matter of priority.

You must leave interest rate determination to the market for funds.

You must be able to distinguish between public spending which is genuinely value adding and public spending on welfare.

You must encourage competition to the fullest extent possible.

Not easy, but that’s what you need to do. Remember 1996-2004. That’s what we did then. Why don’t we try it again?

Why don’t economists get it?

China, India, Japan, US and Europe have weakening or underperformaning GDP growth. And by no coincidence at all, these are all economies that have tried a Keynesian expenditure program to end recession. The thing that is most astonishing is that there is virtually no economist of the mainstream who could even explain it. And as the article points out, this is even happening as the price of oil has plummeted.

Here’s a clue about what’s wrong with modern theory. Our economies are not saving too much. Our economies are being plundered of their savings by our governments who are wasting our resources on projects that will never bring a positive return. Go back to the stimulus packages and other government-directed expenditures of 5-6 years ago – some of which were even ludicrously described as infrastructure investment. What you are seeing today is the absence of the private sector projects that were forestalled back then. We are ruining our economies, and the economics profession is at the heart of the problem. Aggregate demand does not make an economy grow. Economies only grow if there is value adding investment. Seems obvious. Why don’t economists get it?

Keynes vs the classics

A reminder that there will be a debate – more I suspect sequential talking points – between Alan Oster, the NAB’s Chief Economist, and myself on “Stimulus versus Austerity”. This is taking place on Wednesday August 19 @ 5:30 pm at the Imperial Hotel on the corner of Spring and Bourke Streets in Melbourne. If you are interested in coming, email to let him know.

Of course, the reason I’m coming along is because I cannot actually think of how to defend the stimulus at this late stage. Back in 2008-09, even though a Keynesian stimulus had never worked anywhere else, not ever, we might have ended up lucky this time. It’s in all the texts, everyone learns Y=C+I+G, so how could every single economics text in the world have been wrong? But that was then. So I have been tossing around various thoughts on what Alan might say, what I might try to argue if I were defending the stimulus. This is kind of a Paul Krugman/Ken Henry version of all the lame things that might be part of such an argument. And I emphasise, the bailing out of financial institutions is not on the table. The financial crisis was over by May 2009. I am only interested in the public spending side of it. Here are my thoughts:

1) The stimulus worked a treat – we would have been back in the Great Depression if nothing had been done. As dismal as things seem, it is a better outcome than the alternative would have been had nothing at all been done.

2) The imperative was to use up those unused savings. No one was investing. The bottom was falling out of our economies. Savings were going to waste. This is still a problem as can be seen from all those unused bank accounts. People still aren’t spending so the government must do it for us.*

3) The theory was all right but the execution was badly done. A stimulus could have worked but the money was poured into the wrong kinds of activities.

4) We didn’t spend enough. A half-hearted stimulus would not only fail to solve the problem but would discredit the very idea of a stimulus.

5) The problems run even deeper than we originally thought. We are into a secular stagnation, not just a temporary fall off in demand.

6) Let me show you the stats to prove how fantastic things turned out relative to our forecasts at the time.

7) Fiscal policy might have been relatively weak but monetary policy has made a major difference by keeping rates low and encouraging investment.

Have I left anything out? Anyway, come along on Wednesday. For my part, I am going to present a short version of my Liberty Fund postings on “Reassessing the Political Economy of John Stuart Mill”, that is, real classical economics versus Keynesian inanities. We each get twenty minutes and then it is thrown open to the floor. And being Policy in the Pub, there is alcohol as well if that’s your sort of thing.

* Just today, in the AFR, Saul Eslake was arguing more spending is needed to put “idle” capital and labour back to work.