Keynesian policy in the United States

july 4 washington

In Washington, and went to the Mall last night for the fireworks. The best fireworks display I have ever seen, the sky was at the end entirely covered with colour and sound. They were even able to send up in the middle of it a set of rockets that, when they burst, spelled out “USA”. But the very few chants of “USA” also died away as quickly as the fireworks. There’s too much reality around at the moment.

As to reality, there is, of course, this:

Even after another month of strong hiring in June and a sinking unemployment rate, the U.S. job market just isn’t what it used to be.

Pay is sluggish. Many part-timers can’t find full-time work. And a diminished share of Americans either have a job or are looking for one.

The rest of the article is fumbling idiocy as the journalist tries to explain away the actual reality of the American labour market. You need to contrast this great Keynesian disaster with the last time a classical policy was applied in the US.

Beginning in January 1920, something much worse than a recession blighted the world. The U.S. suffered the steepest plunge in wholesale prices in its history (not even eclipsed by the Great Depression), as well as a 31.6% drop in industrial production and a 46.6% fall in the Dow Jones Industrial Average. Unemployment spiked, and corporate profits plunged.

What to do? “Nothing” was the substantive response of the successive administrations of Woodrow Wilson and Warren G. Harding. Well, not quite nothing. Rather, they did what few 21st-century policy makers would have dared: They balanced the federal budget and—via the still wet-behind-the-ears Federal Reserve—raised interest rates rather than lowering them. Curiously, the depression ran its course. Eighteen months elapsed from business-cycle peak to business-cycle trough—following which the 1920s roared.

At the end of my Say’s Law presentation to the Keynesian symposium I attended at Dartmouth I was asked to explain why a classical policy works, which it does. And the fact is, the presuppositions are so different that it is almost impossible to latch onto the differences. If these things interest you – and I am all too aware how few actually, really are – go to my lead article at the Liberty Fund and carefully read the section that deals with the diagram I have there. There you will find macroeconomics before Keynes summarised in less than 1000 words. This is the theory that sat under the policies of the early 1920s. Hoover, and then Roosevelt in spades, a decade later would introduce “Keynesian” policies, the first of many such failures in a policy that has never had a success.

Obama’s plan for peace in the middle east is comparable to his plan for dealing with the unemployed

us unemployment march 2015 adj for participation rate

The picture comes with the story, Here’s What The Unemployment Rate Looks Like If You Add Back Labor Force Dropouts. This is how it is described at Drudge:

92,898,000 Americans Not Working…
Labor Force Participation Rate at 37-Year-Low…
Record 56,023,000 Women Not in Labor Force…
Black unemployment rate nearly twice national average…

It is truly demoralising to watch. But the Democrat-media alliance is fully in charge so don’t expect things to improve any time soon.

Why isn’t Keynesian theory dead, dead, dead?

obama gdp recovery v 1981

This comes via Powerline but is taken from a document put out by the Republicans on the Senate Budget Committee: The Obama Economy: a Chartbook. That 92% of American economists surveyed stated that the stimulus had lowered the unemployment rate below the level it would otherwise have been shows that 92% of American economists haven’t a clue which way is up. You really ought to look at the charts. There really is nothing left to say. Not that the American economy was doing all that well before Obama got his hands on it, but since then the decline has been unbelievable.

Yet the theory that has created this mess is still taught as the mainstream view in economics courses across the world. It’s all Keynesian aggregate demand all the time. But if you are curious about what went wrong, might I recommend you have a read of this.

It will also help to explain this, the incredible fall in median incomes.

obama economy median family income

What you are looking at here is evidence that the infrastructure that supports the American economy is crumbling. It’s not just GDP, which is a temporary measure that goes up and down, but the actual stock of capital that is falling to bits.

Where have all the workers gone?

participation rate us 2013

That’s in the US. I hadn’t seen this before but it comes as quite a shock. It is certainly lucky for the President that there’s a D after his party affiliation or else the media would have roasted him alive. Meanwhile back in Australia:

ELECTION of the Abbott government in September might have lifted businesses’ spirits but it failed to spark a hiring spree, with unexpectedly weak jobs growth in September and a further drop in the number of people looking for work.

The unemployment rate fell to 5.6 per cent in September from 5.8 per cent in August but only 9100 new jobs were created, not enough to keep the unemployment rate stable given population growth.

The participation rate – the share of the working-age population in or looking for work – fell to 64.9 per cent, the fourth consecutive monthly fall and the lowest level since 2006.

The total number of people actively seeking work fell a little to 697,000, while full-time employment grew 5000 to 8.1 million and part-time work expanded by 4100 jobs to 3.5 million, according to today’s release from the Australian Bureau of Statistics.

It is a bit early to expect any turnaround from an election that was only a month ago when these data were being collected. Not good figures at all, but they are part of the legacy our new government has inherited, exactly the kind of thing all Coalition governments inherit from their Labor predecessors.