Skip to comments.The Bankruptcy Of Modern Economics
Posted on 12/07/2013 6:03:14 AM PST by IbJensen
(This cover of the eminent Economist says it all.)
The resounding victory of N.J. Governor Chris Christie has people speculating about the 2016 presidential race, particularly on the Republican side, since its a given among pols and pundits that Hillary Clintons nomination for the Democrats is a foregone conclusion (it isnt, but thats another discussion). The ObamaCare debacle and the foreign policy crises resulting from the Presidents weakening of American power will be in the forefront.
So will the economy. And its in this area that candidates must exhibit an understanding that has dangerously eluded too many policymakers and economists: Most economic thinking today is bankrupt. This intellectual exhaustion and sterility have been graphically exhibited recently by several news stories, a U.S. Treasury Department report and a tax proposal by the IMF .
The New York Times and the Wall Street Journal ran front-page articles and The Economist a cover story on a topic that is truly bizarre: The world economy is suffering because we dont have enough inflation. The Journal piece focused on Europe: Too little inflation will threaten Europes fragile recovery. The latest numbers signal that dangerously low inflationwhich Japan struggled with for two decades and the U.S. central bank has labored in recent years to avoidis at Europes front door. The Times story was equally strange: There is growing concern inside and outside the Fed that inflation is not rising fast enough. Economists, including Janet Yellen, President Obamas nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak.
The sick notion that more inflation is good for growth is epitomized by the Phillips Curve, named after a New Zealand economist who posited that if you want low unemployment you must generate some inflation and, conversely, if you want to reduce inflation you must engineer higher levels of unemployment. But the Phillips Curve has been refuted in countless studies over the years, including a number conducted by Nobel Prize-winning economists. No matter; its todays dogma.
Money is a measure of value, just as inches and minutes are measures of length and time. Money facilitates transactionsbuying and sellingbetween willing parties. Its a claim on products and services, and its infinitely less cumbersome than barter. Changing the intrinsic value of money no more leads to sustainable growth than would changing the number of minutes in an hour or how many inches constitute a foot.
John Maynard Keynes rightly labeled inflation as a form of taxation, and a particularly invidious one. It arbitrarily produces winners and losers, with no concern for effort and reward or for meeting the needs and wants of customers. It rewards speculation rather than such traditional ways of getting ahead as hard work, saving and innovating, thereby undermining social trust and demoralizing a society.
Nevertheless, central bankers like Ben Bernanke and his putative successor, Janet Yellen, claim we need more inflation, preferably an annual rate of 2% to 2.5%. That level would cost a family making $40,000 annually an extra $800 to $1,000 a year in higher prices. If you ever run across a central banker or an economist who shares this weird view, ask that person which elected body gave the Fedor any other central bankthe authority to impose such a tax.
In the early part of the last decade the Federal Reserve and the U.S. Treasury Department instituted a weak-dollar policy, which led to the housing bubble, the boom in commodities, the inflation in farmland prices, hothouse growth in the financial sector and a bubble in bondsand, perhaps, stocks. But just as many doctors in the mid-19th century fiercely resisted Listers germ theory by refusing to wash their hands before surgeries, these policymakers remain wedded to their malignant theories.
The idea that inflation can be controlled like a thermostat or the accelerator of an automobile is preposterous. A central bank can create bank reserves, but how theyre employed in terms of creating credit is out of its hands. In the 1970s the velocity of moneythat is, how many times a dollar is spent during the course of a yearturned out to be beyond the control of our central bank, which was one reason that inflation reached such dangerous levels. The Federal Reserve has tried a new trick with its so-called quantitative easing programs of pigging out on long-term bond purchases to suppress long-term interest rates as a way to stimulate the economy, and that, too, has failed. Instead of a vigorous expansion, the move hurt the economy by distorting credit markets. Rent control damages housing markets; the Fed did the same with our capital markets.
Another example of economic illiteracy was a U.S. Treasury Department report that sharply criticized Germanys supposedly destructive economic policies. Every six months the Treasury issues an analysis of whether countries are using their currencies to gain a competitive advantage over U.S. exports. This report harrumphed that Germany was guilty of relying on exports for most of its growth and that this was hurting its neighbors and, indeed, the whole world. Germanys anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment.
Adam Smith had it right more than two centuries ago with The Wealth of Nations, in which he pointed out that with trade, both sides get something from the exchange; otherwise, they wouldnt go through with it.
Trade enhances wealth. Look at the incredibly intricate global supply chains that make possible such products as the iPad. Folks at the Treasury Department dont know this basic fact: Countries dont trade with each other; companies and individuals do. Treasury assumes that a merchandise trade surplus is equivalent to a company making money and that a deficit is equivalent to sustaining a loss. If that were true, how did the U.S. become the mightiest economy in the history of the world while running trade deficits for 350 of the past 400 years?
The final example of the intellectual illness of economics today is a proposal floated by the IMF that countries quickly introduce a one-time wealth tax of 10%. Put aside the fantasy of one-time. Where in the world did the supposedly bright lights of the IMF get the idea that destroying capital on a scale like that would aid economic growth? Sorry, IMF pooh-bahs, without capital creation and investment, we dont expand.
The recipe for sustained prosperity is simple: stable money, low tax rates, and reasonable rules and regulations, a.k.a. the rule of law. Fooling around with money is like fooling around with weights and measures. It harms commerceand much else.
Many times candidates allow themselves to be overawed by highly credentialed economists. They shouldntjust as effective Presidents such as Lincoln didnt allow impressive-looking generals and admirals to overawe them regarding the military.
I would not be surprised to find Hillary supporting Elizabeth Warren for pres.
Then Hillary gets to be in the Cabinet again, if not a VP. Or Bill is made an ambassador.
When I was recovering from my recent surgery I refused any pain medicine because I needed to know that my pain told me that I was injured and the natural subsidence of that pain was proof of my body healing.. Putting off the pain wasn’t healthy, but it chemically slowed the healing process..
I believe we as a country need to experience the financial pain of misguidance in our economy, to teach us the lessons of failure..
I hope you had a full and complete recovery from your surgery along with long term success.
Your belief that we could learn much from the painful consequences from our actions is healthy. But you forget who we’re dealing with. The arrested development crowd will never ever accept responsibility for their actions. For example, Obama is blaming Republicans for the failure of healthcare.gov. WTH? These types need scapegoats to blame, if not punish. My only question is when do they resort to violence towards those from whom they want revenge??
I voted for Forbes in the primaries. It is a crime that he was too geeky and not photogenic enough.
Bill would make a great AMb-ass-a-door.
Send him to Zimbabwe.
He was my candidate in both primaries he competed in. I even sent him $$$$$. He would have been a great president in the Reagan tradition. Sadly that empty suit W beat him with a bunch of low info voters. Oh well.
I agree. We, as a nation, were stupid enough to not only elect Zero twice, but we have elected presidents, senators, and representatives that have continued to vote for deficit spending. America’s fiscal chickens will come home to roost and the pain will be great.
Inflation is the way nations pay for war. Forbes overlooks war as an inflation driver.
“If that were true, how did the U.S. become the mightiest economy in the history of the world while running trade deficits for 350 of the past 400 years?”
What the who? The declaration of indepence was signed two hundred and thirty seven years ago. Four hundred years ago was the year 1613. The United States of America was not even a glimmer in the eye of the ancestors of yet unborn George Washington but according to Steve Forbes we have been running a deficit for 350 of the past 400 years? Is there not even a concept of truth any longer? Don’t answer me with, “You know what he means.” I certainly DO NOT know what he means, I wonder if HE knows what he means.
Other than that disastrous line I think he is probably dead right in his views on inflation.
I am by far no spring chicken, or a cold turkey, but a old goat with the memory of an elephant.. (zoo analgesia notwithstanding)
I have lived through many threats to our Republic, through and including; FDR, TRUMAN, LBJ, NIXON, CARTER, BUSH I, CLINTON, and BUSH II, and I have always believed we were strong enough to survive these despots..
However, my faith was always based on evidence that our underlining strength lay in our collective memory of our foundation principles of, BY, FOR, AND, OF THE PEOPLE, and enough inter-generational guidance to pull us back from the brink..
Until this boomer generation, we lived with the elders that personally experienced hardships, and recoveries, war and remembrances, that reinforced our resolve to preserver..
This crop of parents have no such struggle to retreat to, for guidance, thus they look for the exit strategy, or a bailout.. Nor do they accept any responsibility for the problems, and there are fewer folks left to tell them the truth that they aren’t as special as they were told..
As of Wednesday, Warren said she wasn't running. Source.
That could change, though, if Hillary looks vulnerable.
“But you forget who were dealing with. The arrested development crowd will never ever accept responsibility for their actions.”
A hearty AMEN to that.
Warren would get crushed by any Republican candidate in the debates...she is not even close to being ready as a candidate. JMHO.
christie is being pushed by the hedonism wing of politicians and unelected staffers.
The GOP needs to strongly go to bat for America jobs.
This is a very strong issue, and needs to be addressed.
America needs to build up America once again.
Just saying. China is getting strong enough, we need to bring our jobs back here.
As soon as we start bringing the jobs back LA dissolves into a pile of radioactive rubble.
Christie needs one of those Walmart handicapped electric carts. You know: the ones all the fatasses roll around the aisles in before they crawl into their cars and drive away.
Anyone who has ever run a "business" - a farm or small shop - knows that "cash is king". Nothing can happen without purchase / sell of liquidity, or major proress - `the only way to exchange any tangible asset it svaalur, service, or