Do economists understand what’s happening to the American economy?

The answer is, of course, no, they don’t. A couple of examples from the very highest reaches of economic theory. First this from The Institute of International Monetary Research:

The accompanying video therefore looks at a different topic. In an article in the current issue of The Oxford Review of Economic Policy, Professor Paul Krugman claims that economic theory and analysis have worked well over the last decade. He is a champion of the well-known Keynesian prescription, that an increase in the structural (i.e., cyclically-adjusted) budget deficit boosts aggregate demand and makes above-trend growth (with falling unemployment) more likely. According to Krugman, cheered on by Keynes’ biographer, Lord Skidelsky, in the Project Syndicate blog, these textbook ideas were translated into policy in the USA and went far to check the Great Recession. Krugman and Skidelsky believe that, in this sense, economics worked.

That is, it worked in the sense that the ridiculously exaggerated forecasts of doom never eventuated. But the recovery never occurred either, a recovery that is occurring now based on principles absolutely and completely antithetical to the policies adopted by those who applied a Keynesian stimulus.

And while we’re at it, I might also mention this, Should We Reject the Natural Rate Hypothesis?, from the latest issue of the Journal of Economic Perspectives. This is the interim conclusion:

To summarize: I read the macroeconomic evidence as suggestive of persistent effects of monetary policy on the natural unemployment rate and potential output. But the evidence is not overwhelming. Moreover, looking just at recessions has its limits: It cannot answer whether there are symmetrical effects of booms and recessions, which is a crucial issue for the design of policy. In this context, a closer look at potential channels of persistence and more microeconomic evidence may help to assess potential nonlinearities or asymmetries between recessions and booms.

And this is the conclusion at the end:

Where does this leave us? . . . The general advice must be that central banks should keep the natural rate hypothesis as their baseline, but keep an open mind and put some weight on the alternatives. For example, given the evidence on labor force participation and on the stickiness of inflation expectations presented earlier, I believe that there is a strong case, although not an overwhelming case, to allow US output to exceed potential for some time, so as to reintegrate some of the workers who left the labor force during the last ten years.

That is, we should keep the theory intact but ignore the theory when it suits us because something else would be preferable. Indeed, if we are looking at the US economy and trying to explain its astonishing reversal over the past year, there is not a theory found in any modern text [except mine] that will help you understand what is going on or why it’s happening.

Paul Krugman vs Steve Moore

Live from Freedomfest in Las Vegas, a debate between Paul Krugman and Steve Moore. The official title is, “How can we restore the American Dream?” which, no doubt, will enter into the issue of economic management and Keynesian theory. We shall see. This is a live blog.

First question, why are we struggling?

K: Worst financial crisis – cut public spending too soon. Lots of wealth created but not much trickling down. Income inequality is a problem.

M: Agrees with K over the level of intervention. Bailouts were a mistake. Stimulus did not create jobs. Obamacare a mistake. Lots of problems. We had a Keynesian experiment that did not work. Reagan v Obama; Reagan turned out well. Obama thought the govt was the solution.

K: Problem for Reagan was inflation. Obama problem was a slowdown in activity. Different problem. If that’s your best answer, you have no answer. Stimulus v austerity you can see a strong positive correlation between spending and growth. The Obama stimulus was not huge; about 2% of GDP at its max. Wasn’t enough. Needed more as often stated.

M: Economists on the left used the Keynesian playbook, and it happened and it did not make a dent in our unemployment. Would more have been better. No one believes that. Reagan was also dealing with a recession. Tax cuts led to a recovery. Obama policies did not work according even to their own estimates.

K: Obama’s predictions was not my prediction. Aftermath of financial crisis is always slow. There is only a few times we need govt intervention. The Reagan policy was one when you did not need one. In 2008-09 we did.

Q: Is the private sector being stifled by excessive regulation?

K: Obamacare is a hybrid. Working quite well. Would like to have a single-payer system. Private companies are the conduit. Bad process. Has turned out to be cheaper than expected. Not blowing a hole in the budget. Repealing Obamacare would lead to a blow out in the budget.

M: Education and healthcare are govt dominated and that is where the costs have risen the most. Third party payments drive up costs. Premiums are blowing out. What about the tax on medical devices?

K: Healthcare costs rise because of innovation. Therefore costs go up. Everywhere else has lower costs where there are national health care. Govt intervention is more efficient than private. Third party payments are a problem.

M: Competition missing.

K: No one goes comparison shopping after a heart attack.

Q: Labour participation rate is low – minimum wage laws. Should they go up?

K: A place I have changed my views. Raising the minimum wage a lot will cost jobs. However, cannot find evidence that higher minimum wages cost jobs. Happy with $15 per hour and if no impact then up to $20.

M: Mostly about kids who are being locked out. Sinister trend. How bout a teenage minimum wage?

K: No evidence that I can see. Re teenagers – I’m willing to think about it but I am against over-complexity of the legislation.

Q: Red State v Blue State job creation.

M: Red State have more free market policies and more employment growth. Lower taxes in red states. Less regulation.

K: Red State employment growth better than in Blue State. What determines who grows faster? Warm winters! Air conditioning is changing employment patterns. The one policy that makes the difference is land use policy. Restrictive land use policies raise housing costs. The factors that matter are:

. weather
. land use policy

Regulation doesn’t matter as much.

M: What about the policies?

K: People like to live where they can buy houses.

M: What about Greece?

K: Advocate of a strong social safety net. Not a big government guy. Govts do a terrible job with the steel industry or the post office.

Q: Favourite economist: Smith, Keynes or Marx?

K: No brief for Marx. Favourite economists Smith AND Keynes. Must sometimes protect the public interest through regulation. With Keynes understand why economies go off.

M: JEL article on The Age of Milton Friedman. My problem is that we live in the Age of Keynes. When have they ever worked?

Q: Welfare Reform Act. Should we attempt to lower welfare.

K: Dispute the premiss. No upward trend in welfare dependancy until the GFC. Then the worst slump and the safety net programs. Alleviated some of the worst suffering. We are not creating a welfare class. You may want to believe it but it’s not true.

M: Post 1996 Welfare Reform Act number of people on welfare fell.

K: Not hardline against welfare reform. Now we have no system for providing income. I think of this as fairly trivial. Food stamps and Medicaid both work and don’t see much need of change.

Q: What three policies would you advocate to restore the American dream? How about privatisation of social security and education.

K: 1) Land use restrictions need to be reduced. Cheaper housing needed.
2) Program to promote equality. Born into a lower class family will reduce future income.
3) Empowering workers, with minimum wage at the start. Increase the bargaining power of unions.

M: Need to help the middle class. And unions contaminate everything they touch.
1) Voucher to every child in the country to promote advantage.
2) Ownership of their own companies.
3) 16-17% flat tax rate.

End discussion. Questions from the floor.

Q: Why health care costs going up and benefits going down?

K: Obamacare has been a lifesaver for certain people. Some people are paying more, but overwhelmingly the effect has been positive.

M: Republicans will change the system. Need more choice.

Q: Debt and deficits

K: Debt levels and growth high correlation, but what is the causation? Debt levels should not be a preoccupation. High debt without one’s own currency is a problem. We are many many percentage points away from a maximum load and it is falling.

M: Depends on what you buy with the debt. Should use debt to finance lower taxes. Low interest rates is what is keeping the country going.

K: The private sector was deleveridging. The lack of spending is why we have a recession. If everyone is cutting back to retain income where will the demand come from? The deficits saved the world from a great depression. Compared with what happens in your ordinary financial crisis, the GFC was not bad.

M: Obama recovery was the worst post-war recovery.

Keynes the big loser in UK election

Here’s a story that I can only hope our local right of centre party takes to heart: The UK Labour party should blame Keynes for their election defeat, written by Niall Ferguson no less. From yesterday’s Financial Times:

Credit where credit is due. Lynton Crosby is getting the plaudits for the Conservative party’s successful election strategy, but the real architect of this victory was surely George Osborne, the chancellor. Leave aside Labour’s collapse in Scotland, arguably the election’s most striking result. In England, the Conservatives won because Mr Osborne was right and his critics were wrong.

The comedian Russell Brand was not alone in having his celebrity endorsement of Labour roundly ignored by the voters. Even more ignominiously humbled were the Keynesian economists who have spent so much of the past five years predicting that the economic consequences of Mr Osborne’s policies would be disastrous.

In the vanguard of the Keynesian attack was Paul Krugman of The New York Times. In August 2011 he denounced the “delusions” of the chancellor whose “experiment in austerity” was “going really, really badly”.

Why? Because, in seeking to bring the government’s deficit under control, Mr Osborne was worrying needlessly about business confidence. “The confidence fairy” was the term Mr Krugman coined to ridicule anyone who argued for fiscal restraint.

Unfortunately for Mr Krugman, the more he talked about the confidence fairy, the more business confidence recovered in the UK. In fact, at no point after May 2010 did it sink back to where it had been throughout the past two years of Gordon Brown’s catastrophic premiership.

Mr Krugman was equally relentless in predicting that austerity would lead to recession; indeed, he insisted that the UK’s economic performance would be worse than during the Great Depression. In April 2012 he warned darkly that Britain would “continue on a death spiral of self-defeating austerity”.

It was, he lamented, a “policy disaster” that would cause a double-dip recession and “cripple the UK economy for many years to come”.

In fact, there was no double-dip recession. The UK had the best performing of the G7 economies last year, with a real gross domestic product growth rate of 2.6 per cent. In 2009, the last full year of Labour government, the figure was minus 4.3 per cent. Moreover, far from being in depression, the UK economy has generated more than 1.9m jobs since May 2010. UK unemployment is now 5.6 per cent, roughly half the rates in Italy and France. Weekly earnings are up by more than 8 per cent; in the private sector, the figure is above 10 per cent. Inflation is below 2 per cent and falling.

I’m not often into book burning but these Keynesian texts, with their Y=C+I+G as the cornerstone of theory and policy, are genuine candidates. If reality actually matters, which it may not actually do, Keynesian theory must now disappear. It is already disappearing from policy. Eventually economic theory must catch up, eventually.

UPDATE: Niall Ferguson has done another similar bit of writing on his blog, which he titles, The Rise and Fall of Krugmania in the UK. But it’s not Krugman, it is Keynes who remains everywhere, just as he did after the “death of Keynes” in the 1980s after the Great Inflation, which could not happen, or at least could not according to Keynesian theory. Report of Keynes’s death are greatly exaggerated, in no small part because no economist can function without aggregate demand by their side.

Even economists are beginning to notice there is something wrong with economic theory

The New York Review of Books ran a seminar series on “What’s Wrong with Economics” which may be found here, including the videos of the various sessions. It has taken more than half a decade for the penny to finally drop that the policies we have been applying do not work and that there may be something wrong with the economic theories we have been applying. This is the “preface” from the NYRB which is so wrong-headed in even setting out the issues that you can already see there is no possibility that they are going to get anywhere near the right answers. But at least the questions are finally being asked, because there is finally recognition that things have gone badly wrong.

This conference is taking place eight years after the onset of the Great Recession in December 2007, and nearly six years after the recession was declared to be officially over in the US in June 2009. Yet the events of six and eight years ago continue to haunt us. One of the great powers of the global economy, the Eurozone, has yet to put the recession behind it, while the uneven performance of the US economy—spurts of growth accompanied by stagnant real wages—has led economists such as Paul Krugman and Larry Summers to ask whether the US has succumbed to “secular stagnation”: Is the economy now burdened with structural impediments which will make strong and sustained growth difficult to achieve?

The Crash of 2007-2008 was an acute crisis of market disequilibrium which has imposed itself upon an economics discipline still giving pride of place to models where market forces nudge economies in the very opposite direction—towards equilibrium. Crises of disequilibrium have occurred with increasing frequency over the past thirty years: with the Latin American debt crises of the 1980s, the American Savings and Loans collapse of the late 1980s, the Scandinavian banking crisis of the early 1990s, the Asian and Russian financial crises of the late 1990s, the American “dot-com” bust of 2000, and the Crash of 2007-2008 itself which has been global in impact.

Yet treating these crises as a series of near-identical events susceptible to economic modelling does not, on the face of it, do justice to the complexity and singularity of the forces which combined to bring them about. Many of these influences seem to have had their origins well beyond the home territory of economics. Doing justice to these outside forces may require a knowledge of ethics, anthropology, contemporary history and politics, public policy, and an understanding of the beliefs, frequently delusional, which seized many of the economic actors before and during the crises.

Among these disciplines it is, unsurprisingly ethics which intrudes questions of value deepest within the territory of economics, and forces a reappraisal of where the discipline stands in the disciplinary continuum between the humanities and the natural sciences. The overwhelming preference of economists themselves is to be as closely aligned as possible with the natural sciences. But with the intrusion of such ethically charged issues as the human fallout from the Crash, and the unrelenting growth of economic inequality in the US and most European countries, the scientific and the normative in economics are becoming increasingly difficult to keep apart.

Disputes between economists which seem to derive from disagreements about data and methodologies may on closer examination be rooted in profound disagreements about values. So it can be argued, and often is, that all of us are responsible for making the best of the opportunities open to us. Those who have ended up on the wrong side of the inequality divide must have failed to make the best of these opportunities and must bear responsibility for their errors, with the state providing just enough support to save them from destitution.

Or, an opposing view, that those falling behind are very often the victims of circumstances beyond their control—globalization, technological change, corporate restructuring—and that the state has a strong obligation to support them generously through difficult times and to provide them with the knowledge and skills needed to cope with new technologies and work practices. But how are these conflicts of values embedded in conflicting views about policy to be resolved?

It may be that these are disagreements of a kind that arise frequently in political and moral philosophy and reflect conflicts of plural values which do not arise in the natural sciences and which cannot be resolved by the forms of reasoning employed by scientists. They may have to be resolved either by the choices and compromises achieved through the practice of liberal democracy, or by one set of values prevailing over another through intellectual and electoral force majeur—as for example the arguments for the legal equality of women prevailed over their opponents in the course of the twentieth century.

Once again a network of beliefs and judgments extending well beyond economics may be called into play, and once again these may be strung out along the ontological continuum between the humanities and the natural sciences. Does this mean that the economist as scientist is slowly but surely being displaced by that hybrid who seems better placed to bridge these divides—the political economist?

If you want to see things properly, you will, in my view, have to start if not exactly here, at least somewhere nearby. Paul Krugman can think we have fallen into some kind of secular stagnation which is not far from being the stupidest of all possible explanations. Having backed the stimulus and the fall of official interest rates to zero, he has no idea that there are others who think that is more than enough to account for the present dismal outcome. They are clueless in New York. I would leave them to their own devices except that they are likely to take the rest of us down along with them. With these people as the leaders of the profession, it is indeed a dismal science.

AND AN ADDED BONUS: There is also Jeff Madrick on Why the Experts Missed the Recession. And why was that? Whatever the reason, here’s why I know he doesn’t know:

By lowering the target rate of interest, known as the federal funds rate, the members of the FOMC can stimulate economic growth, and by raising it, they can dampen growth and inflation.

Real Keynesians and the long run

For sheer emptiness, you can now try this by Jonathan Schlefer: Not even Paul Krugman is a real Keynesian. And why not?

But isn’t Keynes now mainstream? No, say Foley and Taylor. The mainstream still sees economies as inherently moving to an optimal equilibrium, as Wicksell did. It still says demand causes short-run fluctuations, but only supply factors, such as the capital stock and technology, can affect long-run growth.

EVEN PAUL KRUGMAN, a self-described Keynesian, Nobel laureate, and New York Times columnist, writes in the 2012 edition of his textbook: “In the long run the economy is self-correcting: shocks to aggregate demand affect aggregate output in the short run but not in the long run.” He says Keynes and Wicksell are in key respects “essentially equivalent.”

Krugman does point to one exception: If interest rates are nearly zero, as during the financial crisis, markets lose restorative force.

The article is not worth the trouble, but the quote from Krugman does seem to suggest he is being pushed by reality. In the long-run (a year or two perhaps) Say’s Law dominates, the economy is production driven.

And there is this by John Cochrane, which was published in The Wall Street Journal in December: An Autopsy for the Keynesians . A bit premature so far as the academic world goes, but I think this is absolutely true:

This year the tide changed in the economy. Growth seems finally to be returning. The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy.

No government is remotely likely to spend trillions of dollars or euros in the name of “stimulus,” financed by blowout borrowing. The euro is intact: Even the Greeks and Italians, after six years of advice that their problems can be solved with one more devaluation and inflation, are sticking with the euro and addressing—however slowly—structural “supply” problems instead.

C+I+G remains as the basic brainwashing tool, but even here it seems that the sleepers awake.

Krugman’s Keynesian cluelessness reaches new heights

This is economic cluelessness reaching some kind of peak:

The point is that relatively good private sector performance has been masked by public-sector cutbacks; this is the opposite of what you usually hear, but that’s no surprise.

This is, of course, the point of cutting back on the public sector during bad times, as Obama was forced to do. Krugman is describing the current upturn that has followed the sequester. Making virtue of necessity is the way of the world. But the incapacity of seeing what a dismal detour all of the stimulus spending actually was is the province of Keynesians. Of course, the fall in public sector spending shows up as a fall in GDP. But that’s a fault of the statistic, not of the policy.

Importantly, the reality described is of a rising private sector that is finally being allowed to recover by cutting back on public spending. For a true equation of economic growth, you should try Y=C+I-G, just for a change. It’s still pretty subdued by this is why “austerity” has become the universal policy, irrespective of what our economic textbooks say.

Shifting in a Keynesian direction

First there were two articles, one by Paul Krugman with the title, Keynes is slowly winning and the other by Tyler Cowen in reply to Krugman titled, Keynes is slowing losing (winning?). There is now a third, Krugman’s reply to Cowen, In Front Of Your Macroeconomic Nose, in which he says what I believe myself:

Cowen seems to have missed my point; I wasn’t talking about the merits of the Keynesian case, which I believe have always been overwhelming, but about the way macroeconomics is discussed in the media and among VSPs in general. My sense is that this is shifting in a Keynesian direction.

There is no other theory known to anyone other than Keynesian. You can talk about debt and deficits until the end of time, but unless you can relate it to a theoretical understanding of what needs to be done and more importantly why, there is nothing to grab onto when trying to craft policy. Keynesian economics may be ruinous, but you can find it in a million texts and it has been taught for three generations, coming up to four. Even Cowen in his pussycat weak attack on Keynes can do no better than this at the end:

It would be wrong to conclude that Keynes was anything other than a great, brilliant economist. Rather these citations, plus many of Krugman’s points, give you some beginnings for this issue. It’s not nearly “Keynes’s time” as much as many people are telling us, after all his biggest book is from 1936 and that is a long time ago. Keynes is both winning and losing at the same time, like many other people too, fancy that.

Economies are not driven from the demand side. But other than myself and a handful of others, you will find hardly anyone else to say it across the wide expanse of economics. So on we go, tilting back to public spending while real incomes descend and our economies weaken with not a clue why that might be. So at least there is Johnny Cochrane writing this in a discussion of the articles by Cowen and Krugman:

I posted this last week, but I was unaware at the time of the Paul Krugman’s “Keynes is slowly winning” post; Tyler Cowen’s 15-point response, documenting not only Keynesian failures but more importantly how the policy world is in fact moving decidedly away from Keynesian ideas, right or wrong (that was Krugman’s point); and Krugman’s retort, predictably snarky and disconnected from anything Cowen said, changing the subject from Keynesian ideas are winning to the standard what a bunch of morons they’re not Keynesians though I keep telling them to be. . . .

In that context, I added two “Facts in front of our noses.” Keynesians, and Krugman especially, said the sequester would cause a new recession and even air traffic control snafus. Instead, the sequester, though sharply reducing government spending, along with the end of 99 week unemployment insurance, coincided with increased growth and a big surprise decline in unemployment. And ATC is no more or less chaotic than ever. Keynesians, and Krugman especially, kept warning of a “deflation vortex.” We and Europe still don’t have any deflation, and even Japan never had a “vortex.” These are not personal prognostications, but widely shared and robust predictions of a Keynesian worldview. Two strikes. Batter up.

But still no theory to explain why cuts to public spending will raise economic growth while increased public spending will slowly but surely reduce our standard of living. If, however, you are interested in understanding why, there is always the second edition of my Free Market Economics.

UPDATE: One of the great anti-Keynesians has written an article for this month’s Standpoint in the UK, Don’t let the Keynesians Wreck the Recovery. He discusses the famous letter signed by 364 economists across Britain warning of the consequences of Thatcherism, that is, the consequences of fiscal discipline:

Famously or notoriously, depending on one’s viewpoint, the 364 were wrong. To quote Nigel Lawson, who would become Chancellor of the Exchequer in 1983, the timing of the recovery was “exquisite” in refuting the 364’s prognoses. Demand and output started to move upwards in the second quarter of 1981, just as the debate about the Times letter was at its most intense. Although unemployment remained high for some years, the economy gathered pace and in the late 1980s entered another boom. If this was a laboratory experiment for Keynesian economics, its results suggested that the textbook formulas were flawed. Old-fashioned principles of sound finance returned to favour in the UK, while the ratio of public debt to gross domestic product fell to manageable levels. For more than 25 years Keynesian fiscal activism was ignored or even forgotten.

But the events of the 1980s have been ignored, particularly by writers of textbooks. As Tim notes:

But university economists continued to teach Keynesian macroeconomic as if nothing had happened. Sure enough, in Britain many academics realised from the sequel to the 1981 Budget that something was wrong with Keynesianism or, at any rate, with the naive versions of Keynesianism which emphasised the blessings of fiscal fine-tuning. But in the American East Coast universities — notably the Ivy League establishments — the UK’s 1981 Budget was too parochial an event to justify rewriting textbooks and lecture notes. Such influential figures as George Akerlof and Robert Shiller of Yale, Paul Krugman of Princeton and Joseph Stiglitz of Columbia, all now Nobel prize laureates, continued to teach that an increase in the budget deficit adds to aggregate demand and a decrease deducts from it.

And so here we are, dragging our economies down by pretending we are doing them good.

Paul Krugman has no idea what Say’s Law means

In the same week that the 2nd edition of my Free Market Economics has been published, which I began specifically in response to the stimulus that followed the GFC and the certainty that it would fail because of the principles that underlie Say’s Law, I have received copy of a review of a book titled, Seven Bad Ideas. The book is by Jeff Madrick while the review is by none other than Paul Krugman. And here once again we find Say’s Law, as the second worst idea in economics, just after the number one bad idea, “the invisible hand”. If you think the invisible hand is the worst idea economists have ever come up with, you are near enough not an economist, more a charlatan but then he has the Nobel Prize so who’s to argue. This is what Krugman thinks the invisible hand means amongst economists:

Today the phrase is almost always used to mean the proposition that market economies can be trusted to get everything, or almost everything, right without more than marginal government intervention.

What “everything, or almost everything” might consist of is a quite bizarre notion. The reality is that no one thinks an economy will run without institutional intervention at almost every facet of an economy’s operation. Every economist is perfectly aware of the absolute necessity of an institutional structure, much of it at the hands of government, and much of it based on legislation and regulation. There are debates about the sorts of regulation needed and the kinds of legislative penumbra that has to surround an economy. But the notion an economy requires only “marginal” intervention is nonsensical and straightforwardly untrue.

But so what if there are economists who think this. The absolute reality is that every economy has regulation up to its eyeballs. If some of us think less regulation would be better is hardly evidence that the economy is doing poorly because of its absence. You would have to be utterly out to lunch to think the regulation of any economy in the world could be described as light-handed. There must be quite a few gullible types out there if the kind of statement that Krugman makes can carry any weight at all.

But it is the second supposedly bad idea that is an old story. It is what is known as Say’s Law which in its micro form states that demand is created by value adding supply and in its macro form states that no economy ever goes into recession because of a lack of demand and that an economy in recession cannot be resurrected by a stimulus made up of non-value adding forms of expenditure. The macro version condemns just the kinds of expenditure every single stimulus has consisted of. The issue isn’t crowding out. The issue is that public spending uses up more value than it creates. If you waste your resources, your economy will shrink. That is what has happened universally since the “stimulus” and Krugman has not a clue in the world what has gone wrong. Here is what he wrote:

No. 2 on Madrick’s bad idea list is Say’s Law, which states that savings are automatically invested, so that there cannot be an overall shortfall in demand. A further implication of Say’s Law is that government stimulus can never do any good, because deficit spending by the public sector will always crowd out an equal amount of private spending.

But is this “mainstream economics”? Madrick cites two University of Chicago professors, Casey Mulligan and John Cochrane, who did indeed echo Say’s Law when arguing against the Obama stimulus. But these economists were outliers within the profession. Chicago’s own business school regularly polls a representative sample of influential economists for their views on policy issues; when it asked whether the Obama stimulus had reduced the unemployment rate, 92 percent of the respondents said that it had. Madrick is able to claim that Say’s Law is pervasive in mainstream economics only by lumping it together with a number of other concepts that, correct or not, are actually quite different.

Economists can say all they like that the stimulus lowered the unemployment rate but the fact of the matter is there cannot be any actual evidence one way or the other. That the models used by economists almost universally say that a stimulus will reduce unemployment is of itself the only “proof” that it has. The logic goes:

Major premise: a public sector stimulus will reduce unemployment below the level it would otherwise have reached

Minor premise: most economies introduced a public sector stimulus

Conclusion: the stimulus reduced unemployment below the level if would otherwise have reached.

That is, A causes B. There was A so therefore B. There is no evidence since there are no controlled experiments. All this is by assumption only. Well two can play at that game.

Major premise: a public sector stimulus consisting of non-value adding forms of expenditure will keep unemployment higher than it would otherwise have been

Minor premise: most economies introduced a public sector stimulus consisting of non-value-adding forms of expenditure

Conclusion: the stimulus has kept unemployment higher than it otherwise would have been.

And the fact of the matter is that the American labour market has not returned to the level it was at in 2008. Unemployment is a disaster without the slightest evidence that matters are on the mend.

Paul Krugman has not a clue. He is stuck in that Keynesian bunkum from which no actual evidence from the real world will ever dislodge him. The American economy continues to sink because of the straight out ignorance of basic economics of pretty well the entire economics profession (approximately 92 percent). Nothing can be done about it in the short term, but the smug smarmy superiority in the face of the immense harm that he and his likeminded colleagues have caused makes me very angry indeed.

Krugman is obviously a hopeless case. But I will simply state that economic theory will never provide useful guidance during recessions until Say’s Law is once again seen as the fundamental principle it is. And if you are interested in what it means and why it matters, the 2nd edition of my Free Market Economics is the place to start finding out.

The death of Keynesian economics another step closer

You would think the Japanese would at least have absorbed the lessons from the catastrophic results of their first stimulus. Such was not the case so they tried another. Didn’t work again.

The economy of Japan, long stagnant, has taken a sharp turn for the worse: It contracted nearly 7 percent (annualized and inflation-adjusted) in the quarter ending in June. By way of comparison, consider that the U.S. contraction in the quarter ending in June 2009, when we were feeling the worst of the financial crisis, was 4 percent; the worst quarter of the 1982 recession saw a contraction of 2.6 percent. You’d have to go back to the 1940s to see a quarter with a 7 percent contraction in the United States.

As a kind of kiss of death, Paul Krugman was full of praise for the policies adopted, called Abenomimcs after the Japanese Prime Minister Shinzo Abe. This is what Professor Krugman said a year ago:

The really remarkable thing about “Abenomics” — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism.

Another great victory for Keynesian stimulus. A few more victories like that and we will be at poverty levels not known since the 1930s. Possibly as remarkable as the outcome in Japan is that even the commentator at National Review Online doesn’t actually understand it himself. He doesn’t really know why these policies didn’t work and can only say something vague about the mathematisation of economic theory and the difficulties in applying policies that might work in one country to another.

Strangely, the policy adopted in Japan included increases in consumption taxes which I am incredulous that anyone would believe would lead to a recovery. Raising taxes in a recession is dead set dumb, as dumb as raising public spending. Next time they should try lower taxes and lower public spending to see how that works out for a change. I know it’s out of fashion, but you never know what might happen then.

[Via Instapundit]

Krugman and his continuing ignorance of Say’s Law

Following my post on Hollande and Say’s Law, there has so far been just one response, which merely carried an article by Paul Krugman, Scandal in France. The scandal, as seen by Krugman, has nothing to do with

I haven’t paid much attention to François Hollande, the president of France, since it became clear that he wasn’t going to break with Europe’s destructive, austerity-minded policy orthodoxy. But now he has done something truly scandalous.

I am not, of course, talking about his alleged affair with an actress, which, even if true, is neither surprising (hey, it’s France) nor disturbing. No, what’s shocking is his embrace of discredited right-wing economic doctrines.

You would think that the way he writes that the recovery that followed the American stimulus has been a light unto the nations and that the US and Keynes have much to teach us about economic management.

Mr. Hollande, in announcing his intention to reduce taxes on businesses while cutting (unspecified) spending to offset the cost, declared, “It is upon supply that we need to act,” and he further declared that “supply actually creates demand.”

Oh, boy. That echoes, almost verbatim, the long-debunked fallacy known as Say’s Law — the claim that overall shortfalls in demand can’t happen, because people have to spend their income on something. This just isn’t true, and it’s very much not true as a practical matter at the beginning of 2014. All the evidence says that France is awash in productive resources, both labor and capital, that are sitting idle because demand is inadequate. For proof, one need only look at inflation, which is sliding fast. Indeed, both France and Europe as a whole are getting dangerously close to Japan-style deflation.

That Krugman is as innocent as the day is long of the actual meaning of Say’s Law is merely evidence that he is like 99% of the profession who have been mis-educated on a principle that was at the centre of the classical theory of the cycle. He wouldn’t know that either. It is actually shocking to see someone so ignorant of the things about which he so confidently speaks. Well the fact of the matter is that Krugman is an ignoramus who is continually pushing economic advice that is keeping the American economy low and is impoverishing millions of his fellow citizens.

The European economies, and Australia as well, emerged from the Great Depression faster than we have today because they used classical theory and policy to work things out. The UK famously balanced its budget in 1933 at the very trough of the Great Depression. We cut spending here in 1931 and was the first economy to come out of the Great Depression with the Australian trough being reached in 1931 from which time things continually improved.

Only the American economy, with its Keynesian-Roosevelt road to recovery remained in the Great Depression right up until the US entered the war at the end of 1941.

There’s more to the world economy than the US, and even if that is all Krugman knows, even that should make him just a bit more cautious, perhaps a whole lot more cautious in speaking about things he knows nothing about.