A Neat Summary
A neat summary of what the US government and central bank
have accomplished over the past two years:
"...the government seized Fannie
and Freddie, thereby effectively nationalizing a large portion of the entire
US housing market; the Fed nationalized AIG; the treasury secretary told
everybody that he needed $700 billion pronto to patch up the financial sector
or the world would end; the treasury secretary then proceeded to partially
nationalize the US financial sector; the federal government took over two of
the Big Three car companies and threw traditional creditor rights out the
window; the Fed more than doubled the monetary base in six months' time; the
new Obama administration borrowed almost $800 billion to spend on
"stimulus"; the federal government has taken a giant leap forward
to socialized medicine; and just for kicks, the federal government also
banned offshore drilling (though the rules are yet again undergoing
revision)."
- From Robert Murphy's article "Putting Austrian Business-Cycle Theory to the Test"
The above summary leaves out a lot, including the $8000
tax credit and other subsidies designed to encourage greater spending on
houses, the "Cash For Clunkers" program designed to encourage
greater spending on cars, the push for "Cap and Trade" and other
legislation designed to address the imaginary hobgoblin that was originally
known as "Global Warning" and is now known as "Climate
Change", and the altering of accounting rules that miraculously transformed
insolvent, loss-making banks into highly profitable enterprises. It does,
however, paint an accurate picture of a raging bull market in government
interventionism.
If the problem is that you are running in the wrong direction, the solution
isn't to run faster
Ramping up government spending will make the economy less
productive, so it should be no surprise to logical economists that the
"Keynesian" response to economic downturns has a very poor record.
It should, however, be a big surprise to Keynesian economists, and yet they
never seem to be surprised by evidence that their policy prescriptions didn't
work as advertised. Instead, they usually claim that the prescriptions would
have worked had they been applied more aggressively.
For example, according to Paul Krugman (today's
"poster child" for Keynesian economics), the huge fiscal and
monetary stimulus of 2008-2010 hasn't led to a meaningful rebound in the US
economy because it simply wasn't huge enough. Apparently, the US economy
would now be on much stronger footing if the Fed had created, and the
government had spent, a lot more money.
The analysis of post-1990 Japan is another example. Japan
has attempted one stimulus package after another for almost 20 years, in the
process racking up a direct federal government debt that amounts to 200% of
GDP. The result of the longest and most concerted modern-day application of
Keynesian economics has been a long period of economic stagnation, but rather
than acknowledge a problem with the underlying theory the Keynesians tell us
that Japanese policy-makers didn't stimulate enough.
A third example worth mentioning involves the
interpretation of what happened during the Great Depression of the 1930s. In
1939, after about 8 years of what would now be called a Keynesian response by
the federal government to the economic weakness of the time, there were
roughly as many unemployed people in the US as there had been at the 1932
depression trough. But rather than acknowledge the failure of a large
increase in government spending and intervention to generate sustainable
improvement in the economy -- an eminently predictable failure given that
greater government spending generally results in the less-efficient use of
resources and intervention creates uncertainty -- today's advocates of
similar policies claim that the 1937-1939 return of a full-fledged depression
was due to the 1936-1937 reduction in government/Fed stimulus. In other
words, they claim, in effect, that the depression would never have returned
in full force if the government and the central bank had continued to
"stimulate" indefinitely.
One of the most remarkable things about economics is that
failed theories can remain popular for generations. It seems that if an
economic theory meshes with the goals of the politically powerful then it
will never be completely discredited until its relentless application helps
cause total devastation.
Steve Saville
www.speculative-investor.com
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