My Cousin the Keynesian

March 6, 2013

I have this cousin, let’s call him Giovanni.  He is a great guy – industrious, hospitable, great family man.  He is my go to source when it comes to information and analysis about sports in general and baseball in particular.

It is an entirely different story when it comes to economics.  Oh, he is financially successful, but like most Americans he doesn’t understand how the market works.

Now, I am not talking about the “free” market, just the market, which exists everywhere and in every place.  The market is the arena of commerce and whether it is free or not depends on government allowances in the various geographic areas of the world.

So, technology has made it possible for Giovanni and me to rekindle our familial relationship that was forged many years ago through the trading of Matchbox cars.  Well, actually, he is so much older than I am that he made and brought them to me when his family visited ours.  I told you he was a great guy.

He is also good at chasing me through cyberspace by email, facebook, and on open threads of sites where I post my blog to argue economics with me.

Last Friday, he emailed me an article titled “A Breakthrough Speech on Monetary Policy”.  The author, Anatole Kaletsky, is an award-winning journalist.  The “Breakthrough Speech” in question was delivered by Adair Turner, Chairman of Britain’s Financial Services Authority and one of the most influential financial policymakers on the planet.

Clearly both men are dyed-in-the-wool Keynesians because Turner’s speech and Kaletsky’s article both recommended that politicians and central bankers print up lots of money and dole it out to consumers in order to stimulate the economy to end the economic stagnation that the West currently finds itself in.  Specifically, Kaletsky believes the Fed should take the $85 billion it is currently spending to buy government bonds from banks and instead distribute it to every man, woman, and child in America.  He believes, “There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment,” thus ending the West’s economic doldrums.  Further, Kaletsky believes this proposal would not cause price inflation because, “links between monetary financing and hyperinflation are theoretically dubious and historically unjustified”.

So, after digesting this economically nonsensical article, I owed Giovanni a response.

Firstly, I indicated to him that monetary inflation does lead to price inflation unless perhaps productivity keeps up with increased money supply.  Just in the 20th Century, one could look to the Weimar Republic and many Latin American countries from time to time.   Zimbabwe is the most recent example.  In fact, all of history is littered with societies that attempted to inflate their way out of depression and instead brought about hyperinflation.

Secondly, I told him that personally I would gain greatly from Kaletsky’s proposal, but that it would harm the economy in the long-run and further destroy an already disappearing middle class.  Given many Americans spendthrift mentality, could you imagine what would happen if they received “free” money each month from the government?  First off, Uncle Sam would never be able to rescind the policy.  It would be like trying to cut Social Security benefits.

Beyond that, there is no doubt, that unlike the banks, leveraged to the hilt American consumers would spend all of their new found riches on a plethora of consumer goods.  The economy would experience another phony boom based on monetary inflation.  Employment would improve for a while.  The new money would bid up the price of goods and services thereby causing domestic price inflation.

Personally, my real estate investments would increase in value allowing me to sell them to some economically naïve person with free government money in his pockets.  The value of my gold holdings would increase exponentially.  I would be sitting pretty, protected from the impending economic bust that was made inevitable by the phony inflationary boom.

As prices rise, so would interest rates.  All the investments begun at lower interest rates would become more expensive.  Many would not be sustainable at the higher cost of money.  Sound familiar?  It should because this is what happen in the 1990s with the bubble and what also happened in the 2000s with the housing bubble.

As defaults on loans increase, unemployment picks up and the market is thrust into another downturn.   I am sure at that point Giovanni and other Keynesians will blame the free market.  But, of course, the only thing that was free in all this was the money the Fed gave to consumers.

Predictably, his response to my response was that I am living in a fantasy world.  Unfortunately, he is wrong.  The devastation that millions of hard-working Americans would experience if the above plan is enacted wouldn’t be a fantasy. It would be a tragedy.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


The End is Nigh

September 4, 2012

According to data from the Federal Reserve Bank of Philadelphia we are about to enter another recession.  Of course, one would be hard-pressed to convince the over 20 million Americans who remain unemployed or underemployed that the last recession ever ended.  But, I suppose, according to economists it technically did.

Given the circumstance we are in, what can be concluded firmly is what this commentator has maintained all along, namely that Keynesianism is a complete and utter failure.  Yes, it made many Americans feel like the political class cared about them because it spent so much money on their behalf in an attempt to “stimulate” the economy back to good health.  And all the money infused into the economy either by government appropriations, monetized debt, or artificially low interest rates did indeed forestall an economic collapse.  But, like the old Chiffon margarine commercial which warned its viewers that impending doom would befall those that fooled Mother Nature, doom is now ours because Bush, Bernanke, Geithner, Obama, and many members of Congress dared to fool the Free Market.

Naturally, Keynesian diehards will claim that the problem is that not enough money was spent to revive the declining economy.  Well, that is an easy out given that more money could always be spent.  In any event, more money spent would have probably forestalled the next recession even farther into the future, but it wouldn’t have solved the systemic problems in the economy – namely price fixing by the Fed, government spending crowding out private investment, and overregulation.  In fact, with the spending we have had an even worse recession than the last is on the horizon; if more money had been spent the next downturn would be that much larger.

The fact of the matter is that since 2008 we have racked up close to six trillion dollars more in debt with nothing to show for it.  The big spenders responsible will blame the greedy rich who they say do not pay their “fair share” of the tax burden.  But, according to the IRS, in 2007 the richest one percent earned 22 percent of national income while paying 40 percent of all personal income taxes; the top five percent earned 37 percent and paid 61 percent of all income taxes; and the top 10 percent earned 48 percent and paid 71 percent of all income taxes.  Meanwhile, the bottom 50 percent earned 12 percent of the nation’s income but only paid three percent of the nation’s income tax.  So, I am not sure what the President and his coterie are talking about when they claim the rich need to be taxed more in order for them to pay their “fair share”?

I know one thing and that is that the disastrous policies of the U.S. government are responsible for not only the loss of our industrial base, but the current trend of America’s young enterprisers leaving for greener pastures overseas.  High taxation, overregulation, inflation, and the prospects of even higher healthcare costs through Obamacare are the reason for the exodus.

With all of these productive entities fleeing our borders and given that the federal government is close to $16 trillion in debt and unfunded future liabilities, specifically for Social Security and Medicare, adds 10s of trillions more to that total, how is America ever going to meet her future obligations?  To make matters even worse, should interest rates rise to their historic long-term average the annual interest payment on the national debt would more than double.  Using current numbers, the total would eat up 41 percent of revenues collected.  The massive increase in that line-item would require even larger annual budget deficits at a time when America can least afford it.

The problem is that Americans want their Social Security, Medicare, and all the other goodies politicians promise them.  And they don’t seem to mind the endless wars and corporate favoritism coming out of Washington either.  This can be concluded because they continue to reelect the same policymakers that have produced the mess we are in.

On the eve of another recession, leading policymakers in Washington are not discussing what needs to be done to turn the economy around.  Very few are talking seriously about addressing the debt crisis.  Lastly, most Americans who will vote this November are poised to send these same politicians back to Washington.

And that is why the end is nigh.  The end of what you ask?  The end of everything we have come to expect as Americans since the 1970s.  It will be the end of militarism and endless wars.  This time it will truly be the end of welfare as we know it.  It will be the end of political favors to every special interest group under the sun.  Finally it will be the end of living off accrued wealth by producing less and less while at the same time spending like drunken sailors to acquire cheap Chinese goods.  All these things will end because we simply can no longer afford them.  The real question is can we afford what will come after the end?

Article first published as The End is Nigh on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

Will Hurricane Irene be a Blessing in Disguise?

August 29, 2011

“Ghastly as it may seem to say this, the terror attack (911) — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.”

“If people rush out to buy bottled water and canned goods, that will actually boost the economy.”

“First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.”

Paul Krugman (Princeton Professor, New Times Columnist, and Keynesian Extraordinaire on how the September 11th attacks could “stimulate” the U.S. economy)

The above quotation from Paul Krugman represents his economic philosophy embedded in the deepest part of his soul.  That is that spending of any kind during economically distressed times is all that is needed to turn things around.  Following Krugman’s logic, Hurricane Irene with the destruction it wrought in the hundreds of millions if not billions of dollars along the eastern seaboard could be just what the doctor ordered to give the sputtering U.S. economy a jump start.  After all, roof tops will have to be repaired.  Structures and piers will need rebuilding.  And infrastructure like power lines, drainage systems, and roads will need revamping.  According to Krugman’s philosophy the carnage from the storm should be an economic bonanza for workers, tax authorities, and producers of goods.

But, hold on for one minute.  Not only did Krugman’s prediction about the economic benefits of the World Trade Center being destroyed not come to fruition, his philosophy represents an economic fallacy explained by Frederic Bastiat, political economist and member of the French Assembly, in 1850.

In Bastiat’s Parable of the Broken Window, shopkeeper John B. has a careless son who breaks one of his shop’s window panes.  The shopkeeper pays six francs to the glazier to fix his window.  According to many of Bastiat’s contemporaries and Keynesians today this is a good thing since the glazier is six francs richer and will presumably spend that six francs on other goods and services thus providing employment to others.  This sounds great and given the potential to the economy of one broken window you might think that John B. should be hopeful that his son never learns to be careful and breaks many more of his windows in his lifetime.

Naturally, the good shopkeeper doesn’t want to spend all of his profits on new windows and here is where the fallacy of Krugman’s thinking comes into play.  Krugman and his Keynesian brethren only focus on what can be seen in the parable, namely the windfall to the glazier and his potential expenditure thereof. They totally ignore the fact that if the window had never been broken the shopkeeper would have had it and six francs worth of some other good or service to enjoy.  Like the glazier’s expenditure, the shopkeeper’s outlay on other goods and services would also provide employment to others.  Thus destruction of property spending through carelessness, vandalism, violence, or natural disaster enjoys no advantage over ordinary consumer spending.  If it did Europe would have gotten rich immediately after World War II.

That’s why Hurricane Irene will not be a blessing in disguise for our economy.

Article first published as Will Hurricane Irene be a Blessing in Disguise? on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina