Archive for the ‘failure of macroeconomic theory’ Category

« Older Entries

High-rolling Bernanke empties Fed pockets in the last chance saloon

September 14, 2012

The economy is in the tank, the national debt is out of control, the banks are largely insolvent, the housing market is under-water, and Washington is a dysfunctional political jungle.

So hey guys,  let us live things up in the Eccles Building’s Kit-Kat club!   Let us pour a few cool ones down for B.O. on November 6, and enjoy Ben Bernanke’s generosity as an effusive, big-spending Master of Ceremonies.  And always remember that life is a cabaret, old friends,  life is a cabaret!*

Just keep a half eye open for those shadows in the corner of the club. They just may be National Socialists waiting in the wings for inflation to take its toll. And believe me, my friends, life will then be no cabaret, save for those with a penchant for surviving under dictatorship.

Revelers in the Kit-Kat club had been clamoring all night long for the Master of Ceremonies to refill the punch bowl.  Ever anxious to please, Bernanke responded to the cries, as he had  done twice before. This time, however, he forgot the fruit juice. The punch bowl is over-flowing with 80 per cent alcohol  and the spigots will remain wide open until no one is left standing. Now this is a real cabaret!

Quantitative easing 3 is here to stay. The Fed will buy $40 billion of agency-backed mortgage securities a month indefinitely, funding its outlays through the printing press.  It will keep rates at rock-bottom levels through the middle of 2015 and it will retain such an accommodative policy for a considerable time period after the economy strengthens.

As clearly as Bernanke can make it, without using the dreaded words, the Fed is now dedicated to inflating the US economy out of stagnation.  As surely as history has demonstrated, Bernanke is leading the U.S. economy into stagflation.  Given usual monetary lags, Bernanke will be safely exiled on some offshore island by the time that this calamity hits the large majority of Americans insufficiently skilled to avoid its catastrophic consequences.

As always, the prescient will survive. Yesterday gold jumped 2.2 percent to trade at $1,750 an ounce.

* Musical Cabaret 1972

Hat Tip: The Lex Column, ‘QE3′, Financial Times,  September 14, 2012

Tags:, , , ,
Posted in failure of macroeconomic theory, politicization of the Fed, progressive socialism, relevance of economic knowledge, Uncategorized | 1 Comment »

High time to bury the Keynesian multiplier

August 6, 2012

“the time has been, that, that when the brains were out, the man would die, and there an end;  but now they rise again, with twenty mortal murders on their crowns, and push us from our stools”  The Tragedy of Macbeth, Act III, Scene iv

In 1936, John Maynard Keynes offered policy makers what appeared to be a wonderful free lunch that would just keep on giving. He suggested that during periods of recession increases in government spending exert an augmented impact on the national economy. Not only is the national income increased by the initial expenditure, but a follow-on increase in consumption expenditures will multiply that impact. Keynesian optimists pressed the case for high multipliers – as high as 2 in many instances.  In such circumstances, an increase in government expenditure by x dollars would impact the economy by 2x dollars. According to Keynes it did not matter whether the stimulus was transient or permanent. The multiplier would always apply.

Politicians are rare indeed who will turn aside the temptation to belly-up to a free buffet.  So an extended era of persistent budget deficits began.

The first problem with this line of argument is that government spending must (eventually) be financed. It may be financed immediately by taxes, in which case the balanced budget multiplier at best is equal to 1. Or it must be financed by delayed taxes – inflation or the repayment of the debt –  in which case any initial positive multiplier will be penalized by a later negative multiplier.

The second problem is that government spending in a recession almost always redirects resources from more productive to less productive activities. It takes income from households that contribute to the national product to those who do not. It takes income from profitable companies to those who have failed the market test. So, in the balanced budget case, the size of the government expenditure multiplier predictably is below 1.  Increasing government expenditure in a recession will lower the rate of growth of national income (where growth remains positive).

Western nations learned this harsh lesson and abandoned hydraulic –  or old-fashioned –  Keynesian economics during the 1970s. Britain’s Prime Minister,  James Callaghan expressed  open contempt for Keynesian economics during the late 1970s, as his government confronted electoral  defeat in the midst of rising rates of price inflation coupled with increasing unemployment rates and economic stagnation.

Macro-economists responded to this empirical defeat by modeling the macro-economy on the basis of rational expectations, initially along New Classical lines and later on New Keynesian lines. The New Classical School effectively removed fiscal multipliers in their entirety. The  New Keynesian School struggled to keep them in play, albeit with a greatly reduced impact

Following the 2008 financial crisis, however, a number of influential New Keynesians abandoned their new insights and crawled right back into the rotting old-Keynesian infrastructure. In the United States, these economists persuaded the dying Bush and the emergent Obama administrations to indulge in a pure Keynesian stimulus junket. Economists across the globe followed suit.

Well the evidence is now in, decisively, that the Keynesian multiplier works in reverse, systematically slowing economic recovery, the more so the higher the levels of government injection into the economy.

Arthur Laffer (The Wall Street Journal , August 6, 2012) draws on IMF statistics to re-bury the Keynesian fiscal multiplier.  Here are some of his results relating (B) the change in real GDP growth from 2006-07 to 2008-09 to (A) the change in government spending as a %  of  GDP from 2007-09  :

United States              A = +7.3%   B = -8.4%

United Kingdom       A=+6.9%      B =-11.5%

Japan                            A= +6.7%     B= -10.5%

Australia                     A= +3.3%     B= -3.5%

Poland                         A= +2.3%     B= -6.3%

Laffer’s statistics  cover many more countries. Always, the positive stimulus is met with a negative impact on growth rate. For the most part, the larger the percentage stimulus, the larger the negative impact on the growth rate.

Whatever our political leanings, these are facts that cannot easily be ignored.

 

 

 

 

United States:

Tags:, , ,
Posted in budget deficits, economics and public choice, economics of John Maynard Keynes, failure of macroeconomic theory, relevance of economic knowledge, Uncategorized | 7 Comments »

Here they go again: and here comes stagflation!

July 25, 2012

This leaves a second option: the Fed could couple more quantitative easing with a formal announcement of a higher inflation target. Some Fed leaders are open to this. Charles Evans, the Chicago Fed president, has floated the idea of a 3 per cent target, effective until unemployment falls below 7 per cent.  A higher inflation target would lead markets to understand the Fed is committed to quantitative easing of game-changing magnitude, inducing the behavioral shifts needed to make the policy succeed.  Financiers would embrace risk assets rather than safe ones with real returns that would be clearly negative.  Companies expecting more growth , would step up investments.  Consumers, seeing the real value of their debts eroding, would probably spend more.” Sebastian Mallaby, ‘Show some real audacity at the Fed’, Financial Times, July 25, 2012

Mallaby is not alone in this crazy desire to return to the stagflation of the 1970s.  Tyler Cowen and Scott Sumner among many other so-called free market thinkers take the same line.  They have short memories. Once politicians began to exploit the fictitional Phillips Curve, trading off  higher inflation against lower unemployment, the statistiical trade off disappeared. Phillips himself was not at all surprised. He was my tutor at the LSE and advised me of the foolishness of trying to exploit such a purely statistical relationship. Of course,  A.W. Phillips was absolutely correct.

Nations witnessed rising rates of unemployment coupled to rising rates of price inflation and associated with economic stagnation. Politicians abandoned Keynesianism in droves, aware that its continued application would drive them out of the political market-place. Until September 2008, the vast majority of economists were stamping on Keynes’s grave.

The real motive behind inflationist rhetoric is to steal wealth from creditors and transfer it to debtors. Not only is such a policy one version of socialism – that is why true free market economists would never advocate it – but it is also full of moral hazard.

Always a borrower and never a lender be!  A wonderful prescription for economic success!

Tags:, , , ,
Posted in economics of John Maynard Keynes, failure of macroeconomic theory, monetary policy, political philosophy, progressive socialism, relevance of economic knowledge, Uncategorized | Leave a Comment »

The limits of the rational expectations approach

October 19, 2011

Last week I praised the Swedish academy for turning its back on hydraulic Keynesians and awarding the 2011 Nobel Prize in Economic Science to two rational expectations scholars – Thomas Sargent and Christopher Sims. Today I devote a column to the insights of John Kay, who confirms my own view, expressed in earlier columns, that the rational expectations approach must not be pushed too far, as its practitioners are only too prone to do.

“In their world, the validity of a theory is demonstrated if, after the event, and often with torturing of the data and ad hoc adjustments that are usually called ‘imperfections’, it can be reconciled with already known facts – ‘calibrated’. Since almost everything can be ‘explained’  in this way, the theory is indeed universal; no other approach is necessary, or even admissible” John Kay, ‘The random shock that clinched a brave Nobel prize’, Financial Times, October 19, 2011R

 Rational expectations scholars are far from shy in pressing the universality of their approach:

“Asked  ’do you think that differences among people’s models are important aspects of macroeconomic policy debates’, Prof Sargent replied: ‘The fact is you simply cannot talk about their differences within the typical rational expectations model.  There is a communism of models.  All agents within the model, the econometricians, and God share the same model.” John Kay, ibid.

When mere academics talk this way, one knows instinctively that they have lost a lot of contact with reality. I realized that many years ago at a meeting of the American Economic Association when Robert Hall accused me of challenging ‘the revealed truth of the profession’  because I had the nerve to mention the Austrian economics critique of the  rational expectations approach.

Now John Kay makes exactly the same point about Thomas Sargent:

“Rational expectations consequently fail for the same reason communism failed – the arrogance and ignorance of the monopolist.  In their critique of rational expectations, Roman Frydman and Michael Goldberg employ Hayek’s critique of planning; the market economy, unlike communism, can mediate different perceptions of the world, bringing together knowledge whose totality is not held by anyone.  God did not vouchsafe his model to us, mortals see the present imperfectly and the future dimly, and use many different models.” John Kay, ibid.

Perhaps the only characteristic that  hydraulic Keynesians and the rational expectations economists share in common is a belief in the communism of belief in their respective models. In both instances, that is why they should be treated with extreme caution by doubters whose intelligence and insight they are so wont to despise and summarily to reject.

Models that purport to explain everything, but that fail to predict anything correctly,  are not exactly the Gold Standard for an economics profession that does not fare well in predicting the future of the macroeconomy. In truth, such modelers have helped enormously to put the ‘con’ into economics.

Tags:, , , , ,
Posted in criteria for success in doctoral studies, economics of John Maynard Keynes, failure of macroeconomic theory, relevance of economic knowledge, Uncategorized | 1 Comment »

Swedish academy regains its senses

October 11, 2011

Since September 2008, a significant number of economists have abandoned scientific scholarship to embrace the technically flawed doctrine of hydraulic Keynesianism. They include Lawrence Summers, Joe Stiglitz, Paul Krugman, Christina Romer and Bradford De Long, all of whom were exposed to adaptive and rational expectations theories,  all of whom embraced  to some degree, the New Keynesian version of those theories before returning to the economic Stone Age.

Once President Obama entered into office, in January 2009, all these scholars threw away their accumulated learning to join in the progressive bandwagon that would be  fired on the long- broken anvil of John Maynard Keynes.  For a while, it seemed as though the Swedish academy had also jettisoned hard-learned knowledge and was bent on rebuilding the Keynesian vision.

Well, new evidence has now piled up demonstrating that Maynard Keynes and his disciples have no clothes. With all the political oxygen rushing out of a beleaguered White House,  Obama’s Keynesian cronies have deserted his ship and are looking for richer pickings well outside the domain of the Democratic Party.

Thankfully, the Swedish academy has shaken itself loose from the Keynesian corset by awarding the Nobel Prize in Economic Science jointly to Thomas Sargent and Christopher Sims, both of whom have made significant contributions to rational expectations.

According to rational expectations theories, individuals do not respond passively to changes in economic policy or economic conditions.  They anticipate future conditions and adjust their own behavior in their best interests.  This implies that it is hard for politicians to manipulate individuals into behavior that does not make economic sense.  President Obama has learned this lesson the hard way during the first three years of what looks increasingly likely to be a single term in office.

Chistopher Sims yesterday demonstrated that he takes his own models seriously:

“Asked yesterday what he would do with his half of the $1.5 million prize money, Mr. Sims said: ‘First thing I’m going to do is keep it in cash for a while and think.” Editorial,  ’The Return of Rational Expectations’, The Wall Street Journal, October 11, 2011

President Obama must really wish that he had appointed Christopher Sims, instead of Larry Summers, to be his chief economic adviser in January 2009. As must a large majority of educated American voters!  If only all those trillions of wasted dollars were still in the money market!

 

Tags:, , , , , , ,
Posted in do well while doing good, economics of John Maynard Keynes, failure of macroeconomic theory, relevance of economic knowledge, Uncategorized | 1 Comment »

Bob Lucas leads Chicago economics into a Keynesian free fall

September 24, 2011

“If you think Bernanke did a great job tossing out a trillion dollars, why is it a bad idea for the executive to toss out a trillion dollars?  It’s not an inappropriate thing in a recession to push money out there and trying to keep spending from falling too much, and we did that.” Robert E. Lucas, The Wall Street Journal, September 24, 2011

One would expect such fallacious remarks to emanate from  East Coast Nobel Prize winning economists  such as Paul Krugman and Joseph Stiglitz.  When the words pour out over the forked tongue of a Chicago, Freshwater economist like Bob Lucas, one knows that the disease has metastasized and is now spreading out of all control. 

We’re all Keynesians now’ crowed Richard Nixon in 1968, just at the moment when the profession was waking up to the Keynesian fallacy. Well, it turns out that Tricky Dick was focused on the long term, rather than the short, and that he had Nobel Prize winner Robert Lucas firmly in his sights.

There may be some residual hope for Chicago Economics. Lucas has now turned 74 and has moved into retirement, at least from undergraduate teaching. So the minds of the young will not be exposed to the economic mis-perceptions  that Helman W. Watkins Jr. met when he interviewed the Nobelist for his WSJ column. Unfortunately, there is yet another Benedict Arnold – in the form of Richard A. Posner  – still wandering the hallowed corridors of that once great program.  And it must be remembered that Barack Obama was allowed ten totally unproductive years in the Chicago Law School, learning from Judge and Senior Lecturer  Richard Posner, while awaiting his opportunity for a Liberal-Democrat bid for the  White House.

In any event, and for whatever reason, it turns out that Bob Lucas was an early advocate  for Obamanomics:

“I ask about a report that he voted for Barack Obama in 2008, supposedly only the second time he had voted for a Democrat for president.  ‘Yeah, I did.  My parents are dead for a long time, but my sister says, “You have to vote for Obama,for what it would have meant for Mom and Dad.’  I felt that too.  It’s a huge thing. This history of racism has been the worst blot on this country.  All of a sudden this charming, intelligent guy just blows it away. It was great.’ ” Holman W. Jenkins, Jr., ‘Chicago Economics on Trial’, The Wall Street Journal, September 24, 2011

Well, it was a momentous shift to the left for the United States. And President Obama really did help to blow the United States economy downwards  on its free fall into Second World status.  Just as Bob Lucas (and Richard Posner)  have done their level best respectively to blow Chicago Economics and Chicago Law downwards  from Freshwater to Saltwater status in one generation. 

 Let us hope and pray that Bob Lucas’s loss of focus is a monetary mis-perception that triggers just a real, Pareto-optimal economic cycle and not a permanent  prisoners’ dilemma  downshift in real economic performance.

If not, then there is a great deal of ruin in this particular Nobel Prize in Economics. And let us keep our fingers firmly crossed lest another Nobel Prize might be under consideration for the second Benedict Arnold on the Chicago faculty!  Or even, once Barack Obama is ejected from the White House, for the newly-returned Third Man.  After all it is the Swedish Academy that awards the Nobel Prize in Economics.

Tags:, , , , , , , , ,
Posted in budget deficits, economics of John Maynard Keynes, failure of macroeconomic theory, monetary policy, political philosophy, progressive socialism, relevance of economic knowledge, Uncategorized | 1 Comment »

Let’s not twist again

September 22, 2011

“Come on let’s twist again like we did last summer

Yea, let’s twist again like we did last year

Do you remember when things were really hummin’

Yea, let’s twist again, twistin’ time is here

Yeah round  ’n up ‘n down we go again

Yea, let’s twist again, twistin’ time is here.

Chubby Checker Lyrics, 1961″

 Chubby Checker’s  twistin’ time is here again!  On September 21, 2011, The Federal Reserve Open Market Committee  announced its decision to revert to a 1961 policy twist designed to reboot the United States economy.  The stock market saw the policy for what is was worth: the Dow Jones Industrial Average dropped 283.82 points on the news flash.

 Ben Bernanke has done it again! When Bad Ben is about to make a policy statement, sell the U.S. stockmarket short and you will make a packet. That is what happens when progressive socialists occupy positions of authority in a market economy.

To be fair, the problem does not lie entirely with Bernanke and the other six stagflationers on the Federal Reserve Open Market Committee who voted with him, though it surely does not lie with the three dissenters who stood up for price stability and sound money.  The problem lies also with the dual  mandate Congress gave the Fed – to pursue maximum employment and stable prices over the long term. 

 This dual mandate is not required of central banks in the rest of the world, where the pursuit of stable prices is the only mandate imposed.   The current state of economic knowledge does not support the dual mandate, since the goals of maximum employment and price stability often appear to be in conflict. Monetary policy should be restricted to promoting sound money and price stability. Laissez-faire capitalism,  operating under sound money and the rule of law, will do the rest. 

The F-twist, in its 2011 manifestation, involves the Federal Reserve selling off immediately $400 billion of  its  Treasury notes due to mature within three years or less while simultaneously purchasing $400 billion of  Treasury bonds  at the long end of the market – with six to 30 year maturities.  The intent of the F-twist is is to put further downward pressure on longer-term interest rates and to help to make broader financial conditions more accommodative. With long-term interest rates already at historic lows, this policy is unlikely to promote an investment boom across the United States.

The F-twist goes further than this.  The Fed will also invest the principal payments that it receives on its asset holdings into mortgage-backed securities, rather than into U.S. Treasuries.  The objective here is to reduce yet further mortgage rates, thus supporting the housing market.  With mortgage rates already at historic lows, this policy is unlikely to reverse the downward trend in house prices or materially to reduce the foreclosure overhang that is the key symptom of house-market disequilibrium in the United States.

The F-twist clearly worsens the balance sheet of the Federal Reserve. With its balance sheet distorted  by excessive long maturity holdings, should sound money require significant increases in long-term rates of interest, the Fed’s assets could be halved or more as bond prices collapse.  With its balance sheet distorted by holding high risk securitized mortgages, if foreclosures get back on track, significant portions of the Fed’s assets may turn out to be worthless.  Both possibilities render the Fed a hostage to fortune.

If the Fed were restricted to a single mandate of  ensuring sound money, it would more likely acknowledge the evident truth of September 2011. The United States economy is experiencing a capital strike that will continue until President Obama is removed from office, be it in 2012 or in 2016.  Few firms will invest in market development or will hire new employees while uncertainty about the future of the federal debt and question-marks over the direction of progressive socialism hang over the market-place.

Only the political market-place can clear those uncertainties and determine whether the United States will continue on its current trajectory into Second World status, or whether it will recover its exceptionalism and, once again, show other nations a clean pair of economic heels.

Unfortunately no agency of government can twist its way around that epochal  choice. It can only take the economy round ‘n round and up ‘n down again!

Tags:, , , , , , ,
Posted in budget deficits, economics and public choice, economics of John Maynard Keynes, failure of macroeconomic theory, Housing market economics, media rhetoric, monetary policy, mortgage crisis, political philosophy, politicization of the Fed, progressive socialism, relevance of economic knowledge, Uncategorized, weakening of the dollar | Leave a Comment »

Nobel prize Winner, Robert Lucas as idiot savant

September 7, 2011

Robert Lucas won the Nobel Prize in Economic Sciences for his contributions to the theory of rational expectations. The timing of his award itself signified the limitations of his theory. For Robert Lucas had been divorced by his first wife some 9.5 years before the Prize was awarded. His divorce settlement required him to transfer half of the prize to his ex-wife should he receive the Award less than 10 years after the divorce became final. So Lucas had to pay up half a million dollars  for his monumental error of judgment!

Robert Lucas still stands by his theory, even in the wake of the financial crisis.  Asked why academic economists have so little to contribute to predicting the course of events, the sage responded by explaining that the crisis was not predicted because economic theory predicts that such events cannot be predicted. Wow!  That response is surely  worth a high Chicago University tenured salary!

John Kay dissects this line of thinking in a splendid Financial Times column on September 7, 2011.  He admits that there can be no objective basis for a prediction of the kind: ‘Lehman Brothers will go into liquidation on September 15, 2008′ because if there were, people would act on that expectation and Lehman would go into liquidation straight away.  The economic world, far more than the physical world, is influenced by our beliefs about it.

As Kay explains, such reflexivity leads to the efficient market hypothesis (EMH) which claims that all available knowledge is already incorporated in the price of securities.  The hypothesis is substantially correct.  But if it is a mistake to ignore the efficient capital market hypothesis, it is an enormous mistake to take it too seriously.  Market prices incorporate a great deal of information; but not necessarily accurately or completely.  There are usually wide and persistent differences in beliefs, and widely different perceptions of an uncertain future.

Surely, there can be no method that systematically identifies departures from EMH because, if there were, people would act on that knowledge, and the observations would cease to be anomalies or exceptions:

“But to conclude that there is no general model of exceptions and anomalies in the EMH is not the same as saying that such anomalies and exceptions do not exist.  The behaviour of great industrialists such as Henry Ford and Steve Jobs, or great investors such as Warren Buffet and George Soros, cannot be predicted by general rules.  If such prediction were possible, their actions would have been anticipated and these individuals would not have been innovative or become rich.  And similar unpredictability applies to the actions of great fools, such as those who believed that securitization conjured immense wealth out of thin air.  Like ingenuity, stupidity endures but constantly finds new ways to express itself.” John Kay, ‘Ingenuity and stupidity endure, but they defy all prediction’, Financial Times, September 7, 2011

John Kay concludes that profit opportunities are not easy to come by, but the search for such opportunities drives markets.  Nothing could be stranger – or more deeply irrelevant – than a model of the market economy whose axioms exclude its central dynamic.

I conclude that only a bunch of economists located in a non-market economy such as Sweden would ever recognize such a  theory as justifying a Nobel Prize in Economic Sciences. It is rather like a bunch of socialists in Norway awarding a Nobel Peace Prize to Yasser Arafat!

Tags:, , , , , ,
Posted in failure of macroeconomic theory, relevance of economic knowledge, Uncategorized | Leave a Comment »

Ben Bernanke flunks Economics 101

August 27, 2011

At the annual Jackson Hole, Wyoming all-expenses paid, extravaganza for the barons of global financial markets, Federal Reserve Chairman Ben Bernanke  displayed complete ignorance of market economics and unadulterated  adulation for socialism.

The American economy is faltering in its economic recovery from the 2008 recession for several reasons. The most important impediments to recovery are (1) a monetary policy that has flooded the system with high-powered money that will convert to serious inflation the moment that significant recovery commences;  (2) fiscal policy that has flushed trillions of U.S. dollars  down the toilet, significantly worsening a federal debt crisis that hangs like an albatross across the private sector of the economy; (3) massive over-regulation of the private sector that deters new business initiatives and curtails hiring incentives among already-established companies; (4) an inefficient tax system designed to create tax exemptions for special interest groups while imposing high marginal income tax rates on hard-working successful firms and individuals.

A Federal Reserve Chairman who understood the model underpinning this assessment would recommend the following policy reforms as the basis for effective economic recovery: (1) the slow but persistent tightening of the monetary corset designed to eliminate the excess overhang of high-powered money; (2) serious stress-testing for all major U.S. banks designed to remove access to the Federal Reserve for any financial institution that fails to maintain a well-defined, substantial Tier One capital ratio; (3) a systematic tightening of the federal fiscal corset designed to move the  budget into a sustainable balance and to reduce federal spending to 20 per cent of gross domestic product by 2014; (4) significant deregulation of the private sector- major financial institutions excepted – including the elimination of the minimum wage; and (5) tax reforms designed to eliminate all tax exemptions and to lower marginal rates for all households while raising overall tax revenues to 20 per cent of gross domestic product by 2014.

Ben Bernanke’s remit, of course is limited to items (1) and (2) on that list, but his voice might count for something on items (3)-(5). At least he would be making a good Paul Volcker try to rectify policies that are driving the U.S. economy into an economic black hole.

Instead, Ben Bernanke flunked the test completely. The thrust of his remarks favors a continuance of monetary over-expansion, continuance of the monetary coddling of failing banks, a new injection of Stimulus IV, the propping up of property prices across the nation, and the abolition of the Bush tax-cuts, without any consideration of fundamental tax reform.

Repeat the academic year, Mr. Bernanke, and learn some real economics from scholars who understand how free market economies actually operate.

Tags:, , , , , ,
Posted in Bank Regulation, budget deficits, do well while doing good, economics and public choice, economics of John Maynard Keynes, failure of macroeconomic theory, Housing market economics, monetary policy, mortgage crisis, political philosophy, politicization of the Fed, pro-union policies, progressive socialism, relevance of economic knowledge, Uncategorized, weakening of the dollar | 1 Comment »

Keynesian fiscal furnace still roars; with predictably negative outcomes

August 25, 2011

Give President Obama and the two Pelosi Congresses credit for this much: They said they would spend our way out of recession, and they sure gave it the old Beltway try.  The problem is that we got the spending  without the promised economic activity.”  ‘What Austerity?’, The Wall Street Journal, August 25, 2011

Spending by the United States federal government in fiscal 2011 – which ends on September 30, 2011 – will reach a new historical high of $3.6 trillion, an increase of $141 billion from 2010.  This represents an increase of approximately one third in just four years from 2007.  In 2011, spending will come in at 23.8 per cent of gross domestic product, up from 20.7 per cent in 2008.

The spending increases were promised. Eonomic recovery was also promised, together with significant job creation.  Neither is remotely on the horizon. The hydraulic Keynesian economic advisors -  Larry Summers, Christina Romer and Austan Goolsbee -  have long since fled the capital to take up asylum behind fortified ivory towers. Like Colonel Gaddafi in Libya, President Obama is wandering around the tunnels beneath the White House, no doubt contemplating if he can make it to Annapolis, and a naval exit to some island refuge.

The mouthpiece of Washington politics, the Congressional Budget Office is still painting rosy scenarios in an attempt to shore-up the President’s 2012 campaign. Like propagandists for Saddam Hussein who, in 2003, reported the widespread destruction of  retreating  U.S. cavalry, this is pure fantasy. 

The CBO forecasts a decline in the deficit from $1.3 trillion in 2011 to $973 billion in 2012 and to a mere $265 billion in 2014.  This assumes that federal spending will increase by only $12 billion in 2012, a fiscal corset that even President Ronald Reagan never achieved. President Obama is already calling from his bunker for significant additional spending in 2012.  The forecast also assumes that Medicare payments to doctors will decline by 30 per cent beginning in 2012 – a promise that Congress has been making since 1997 and has never delivered, and never will.

The rest of the CBO’s projected fiscal turn-around supposedly will come from increasing federal revenues when the Bush tax cuts disappear in 2013.  President Obama already is ring-fencing those tax cuts for all save the most wealthy households – and wisely so if he is to have any hope of coming out of his bunker. 

So We the People are supposed to believe that federal tax revenues will rise from 15.3 per cent of gross domestic product in 2011 to 19 per cent in 2013 and to 20.2 per cent in 2014 as the U.S, economy rockets to a growth rate of 4.4 per cent in 2014 and to 5 per cent in 2015, despite huge tax increases on capital gains, dividends, small businesses and workers in 2013.

Beam us all up Scotty. But please leave the President in his bunker until November 2012. At that time, We the People can pull him out and clean him up like we did for Saddam Hussein.

Tags:, , , , , , ,
Posted in budget deficits, economics and public choice, economics of John Maynard Keynes, failure of macroeconomic theory, health care legislation, political philosophy, progressive socialism, relevance of economic knowledge, Uncategorized, weakening of the dollar | Leave a Comment »

« Older Entries
Follow

Get every new post delivered to your Inbox.

Join 68 other followers