Economists and the stimulus – a five years after review

The Global Financial Crisis ended in the middle of 2009 at the very latest. A big explosion followed by the TARP and then nothing. Wherever your economy was by June that year, that was all there was. Not good but also not the Great Depression either. But also around the end of 2008 and then into 2009 there were the various Keynesian demand programs put in place that are the actual problem we face today. Credit is available and can be had and at relatively low rates. No one is in fear of some financial explosion, at least not in any serious way. Everyone is wary but no one is desperate.

The problem now is debt and deficits. Every economy is very quiet. Nowhere is there robust growth and a rapid return to full employment. Our economies are struggling to rebuild with no exception of any importance that I can think of although there is, as always, a range of outcomes. So we come to this survey on government policy conducted in the US. First there was this:

Question A: Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.

For me, an unbending Strongly Disagree. That our economies would go flat and the labour market would stop dead were straightforward, but I don’t use a Keynesian model. These were the actual results:

Strongly agree             39%
Agree                          43%
Uncertain                      0%
Disagree                       2%
Strongly disagree          0%

But then they asked this:

Question B: Taking into account all of the ARRA’s economic consequences — including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects — the benefits of the stimulus will end up exceeding its costs.

You might perhaps argue that the net effect on jobs was positive even if the cost to the economy was massive. This is the true test of economic idiocy and on this they abysmally failed. These were the expert opinions:

Strongly agree             20%
Agree                          36%
Uncertain                      23%
Disagree                       5%
Strongly disagree          0%

Only one in twenty disagreed and that was only mildly. There is no understanding these results other than the impossibility of even understanding why there might be a problem trying to encourage economic growth from the demand side.

Spending does not make an economy grow

A note by Karen Maley in the AFR today brings enlightenment following my post on True Confessions yesterday. There she wrote:

Dalio and his team at Bridgewater, the world’s largest and most successful hedge fund, which manages about $150 billion in global investments, argue in a note to clients this week that in the old days, central banks used to cut interest rates to stimulate the economy. But that all changed when interest rates fell to zero per cent. At that point, central banks instead adopted quantitative easing (QE), or printing money and buying financial assets such as bonds. This pushed up the price of financial assets, and central banks hoped those who owned these assets would feel wealthier and would spend more, and this would, in turn, trickle down to stimulate economic activity. [My bolding]

I do not know what to make of this Keynesian dreck any more. If this is the actual dinkum basis for the quantitative easing we have been having, then this is worse than insane, assuming financial suicide is a form of peak insanity.

Spending does not make an economy grow. I’ll say it again. Spending does not make an economy grow. Putting in place real productive assets makes an economy grow. Can you see the difference? Apparently there are folks in powerful positions in every major central bank in the world, and probably in every Treasury as well, that can’t see the difference. But the difference is in having low growth economies that never seem to budge and high growth economies where the largest problem is a shortage of labour.

The German election

The German election is another milestone of governments moving to the right with the re-election of Obama the standout exception. But my interest is the economic policies that led to such a stunning outcome. Where is the textbook that will explain any of this to you?

During the campaign, Merkel said that insisting on reforms in euro countries that received aid was the only way to raise Europe’s competitiveness, citing the fall in German joblessness from a post-World War II high of 12.1 percent in 2005 following a labor-market overhaul. The German unemployment rate is now 6.8 percent compared to 12.1 in the 17-nation euro region. German 10-year bond yields are 1.94 percent, while comparable U.K. gilts yield 2.92 percent and U.S. debt 2.73 percent. . . .

For now, with wages rising and the budget deficit virtually eliminated, voters backed her handling of the domestic economy, and her push for austerity in the euro zone in exchange for aid.

Right now I have arrived at the macro section of my course and am teaching the standard aggregate demand-aggregate supply mantra of the 99%. It just strikes me as utterly incredible that this is still what we make every student of economics learn. Evidence based policy is not much in evidence it seems to me.