The Intentional Ignorance that Influences Economic Policy
FUTURECASTS online magazine
www.futurecasts.com
Vol. 3, No. 6, 6/1/01.
|
The Keynesian myth makers await the future: |
Like an association of professional ghouls,
the Keynesian economists calmly await the next substantial recession.
They need a recession to rescue them from their current deserved
banishment from the corridors of economic policy making. ? In the developed world, the dominant concept today is that of the "golden straight jacket:" You must maintain a reasonably balanced budget and a stable currency if you want to reap the cornucopia of material benefits that can be produced by capitalist systems. ? |
|
|
However, when the business cycle again turns down - as it inevitably
must - the Keynesians will crawl out of the woodwork
and back into the thick of the policy debate. They will probably
succeed in again rising into positions of considerable influence,
for they have much to offer. ? The basic economic policy concern of most political leaders is generally not the long term welfare of the nation. Their basic concern is to assure the appearance of prosperous economic conditions until after their regime is over or, in democracies, until after the next election, no matter what the long term costs may be ? For this and similar purposes, governments have historically resorted to clipping the coinage - running the monetary printing presses - and running chronic budgetary deficits. They resort to these policies because these policies always work to bring temporary relief from budgetary constraints and provide the appearance of prosperity. That's why political leaders have always been tempted to use them. ? |
|
|
However, these policies also ultimately always
bring on inflation that invariably reaches intolerable and
ruinous levels - and inflation in turn ultimately always leads
to depressed economic conditions. ? The Keynesians are valued by political leaders because the Keynesians give intellectual respectability to these ruinous policies. They provide an economic propaganda myth that purports to show how these irresponsible fiscal and monetary policies can be used to avoid the business cycle without generating intolerable levels of inflation and the ultimate depression that inflation always causes. ? But their theories are obviously invalid. That's why reality has so often perversely refused to conform to Keynesian expectations (see the 20th Century Absurdities for the years subsequent to WW II). That's why so many Keynesian assertions have been rendered demonstrably absurd by the course of economic events (see Economic myths). ? Professor Paul Krugman is currently the most prominent economist advocating Keynesian solutions to systemic economic problems. He is not phased by the obvious failure of massive budget deficits and interest rates maintained close to zero to revive Japan's faltering economy. He advocates "managed inflation" as a cure for Japan's "liquidity trap." Japan's massive budget deficits have failed to achieve the promised Keynesian results, so now inflation is being touted as desirable. ? |
|
The basic concepts of Modern (Keynesian) Economic Theory -
such as the concept of the savings gap (or "liquidity
preference") and their propagandistic pummeling of "trickle down"
economic policies and the laissez faire straw man
(see below), the definitions of "economic
health," "inflation," and of "capital," their formulistic reliance on statistics
and inappropriate forms of mathematical reasoning (to be
covered in future FUTURECASTS issues), are more than just invalid; they are demonstrably
absurd. ? Political propaganda myths influential in the economic policy debate include the liberal propaganda slogans, "social justice," "it will hurt the poor," and "fairness," and the conservative supply side monetary policy and the myth of the conservative majority (see below). |
|
|
The business cycle - the periodic undermining
of capitalist prosperity - is attributed by Keynesians to savings
rates that increase beyond that needed for investment. Perhaps
no concept is more important to Keynesian economists - or is more
obviously invalid. This concept gives rise to the strange notion
that savings are bad. ? |
|
|
To reach this "white is black" conclusion,
these economists assert that, as income increases during periods
of prosperity, income will increase faster than consumption.
While some of the resulting savings will be directed back into
the commercial stream by means of investments, some won't, ultimately
causing the end of any existing economic boom and initiating
a period of economic decline and increasing unemployment. ? When savings begin to lie idle at the height of an economic boom - when wealthy people begin to "prefer liquidity" to consumption or investment - the Keynesians argue - increasing quantities of the goods and services available on the market are not acquired, ultimately leading to the onset of recession. ? |
|
|
The savings gap, or "liquidity preference,"
as a primary cause of economic recession, is just a Keynesian
myth. The concept ignores 200 years of capitalist economic history,
and all the particular causes of each particular recession or
depression during that period. Most importantly, there is no
evidence that any saver or savings institution has ever had trouble
putting savings to work during any period of economic prosperity in England
or the United States in at least the last 80 years. ? The rapid matching of available savings with available investment opportunities would indeed be difficult for mere men, but it is easily achieved by the mechanisms of the modern capital and money markets. In these markets, the supplier of savings meets and satisfies investment demand at a price, the same as occurs in a market for corn. ? While savings may lie fallow during the deepest depressions when investment returns offered are low and risks perceived are high, the high yields offered and confidence that exists during periods of prosperity draw all available savings to market and, indeed, typically results in a shortage of savings as indicated by the high yields such savings command. Typically, during prosperous times, interest rates are pushed up to unsustainable heights by the extent to which investment demand exceeds the savings available to meet that demand. ? During the Great Depression, the advent of unused savings didn't occur until after the Depression had been grinding downwards for more than two years. Savings actually declined for the first time in 12 years during the last fiscal year before the Great Depression. ? |
|
|
Aside from mere weakness in theory, this distressing
lack of correlation between savings gap theory and observable
fact continues. During the last phase of recent periods of prosperity,
savings rates didn't rise, they declined. Investment opportunities
rose faster than savings - proliferating so rapidly that savers
frequently began bypassing savings institutions to invest their
savings directly. Disintermediation - a decline not just in savings
rates but in total savings placed in savings institutions - occurred
regularly at the height of each boom during the 1960s and 1970s. ? Thus, excessive savings rates played no roll in initiating the Depression or any other recession since that time. Nor can such a savings gap - or "liquidity preference" - ever be the cause of recession in an economy with a modern functioning banking system. Until recessions reach substantial depths, banks have no trouble lending out all savings in their possession, either directly or through the money markets. ? Keynes wrote his savings gap theory during the depths of the Great Depression when the banks were indeed loaded with deposits that no creditworthy borrowers wanted, and many people were afraid to entrust their savings to banks that might fail. Adherents uncritically accepted the savings gap bogey man as truth. ? |
|
|
The problem today is obviously not too much
savings, but too little savings. Technological progress
inevitably increases income inequality in favor of those who
can best use the new technology to increase their productivity.
Those in the upper income brackets can be expected to save more
than those in the lower income brackets. Keynesian economists,
like John Kenneth Galbraith, assert that this must lead to sharply
expanded savings levels and a severe, perhaps chronic, condition
of recession and underemployment. ? However, here, too, reality perversely refuses to conform to Keynesian dogma. Since the early 1980s, savings statistics indicate that savings rates have been declining even as overall prosperity and income inequality have been growing. Savings rates are currently at all time lows. At the height of the bull market and economic prosperity of the 1990s, we had "negative savings." Economists express great concern regarding the nation's dependence on investments from abroad to meet its capital needs. ? However, the obvious Keynesian remedy for low savings is an increase in the income of the wealthy. Isn't it strange that no Keynesian economists are advocating this obvious remedy - and are instead so inconsistently opposing reductions in marginal tax rates and deploring the inequality that results as the wealthy prosper. ? During the Clinton administration, income inequality expanded even further, and government deficits - both state and federal - turned into surpluses, allowing governments to increase "savings" by actually paying off some of their debts. All of this occurred without throwing the economy into chronic recession or underemployment. ? |
|
|
Of course, ultimately, there will be another recession.
The business cycle has not been repealed. There are, indeed,
many economic weaknesses growing in our economic system that
must ultimately lead to the next downturn in the economic cycle.
Many of them are the result of powerful noxious economic incentives
in our tax code, which will not be addressed until crisis forces
the issue. See Economic
futurecast. But those weaknesses do not and will not
include an increase in the savings rate. ? The Keynesian economists anxiously await the coming. Galbraith ardently expected that the mild recession of 1990 would turn out to be a depression that would lead to the chronic underemployment predicted by Keynesian dogma. But capitalism does not fail - unless government stupidity causes it to fail. |
|
The policy that wasn't: |
Laissez faire is the favorite "straw man"
of the government activists. Any objection to interventionist
economic policies is met with the question: "Do you want
to go back to a do nothing, laissez faire policy?" They
might as well be asking: "Do you still beat your mother?" ? |
|
|
Like everything else about Modern (Keynesian) Economic
Theory, even the "opposition" economic theory it purports
to compete against is a fraud. This is very convenient. It is
obviously easier to misrepresent what the alternatives are and
then to discredit a policy alternative that has never actually
been practiced, than it is to deal with the actual economic practices
that made the United States the world's preeminent economic power. ? What makes the laissez faire straw man particularly effective is that the concept was actually used as a propaganda slogan in the 19th century. In fact, it was used extensively by liberals - who at that time favored individualism in both government and economics. Then as now, it was easier to use a convenient propaganda slogan than to discuss the dreary details of why some particular government intervention in the economy should be considered undesirable. ? Economic policy during the 19th century was not just neutral - it was clearly favorable to business and designed to facilitate commerce. This does not mean that it was always wise, effective, or free of less noble purposes. However, the overall effect was sufficient to create a political, social, and ideological environment that facilitated commerce and permitted business to thrive. ? During the two decades when Keynesian theory dominated economic policy - from 1960 to 1980 - the short sighted, financially irresponsible, anti-business, anti-profit thrust of government policy was not merely a 90 degree switch from laissez faire neutrality to government intervention of an obstructionist nature - it was a complete about face - a 180 degree turn from the economic policies of the past. ? |
|
|
The effort to facilitate commerce involved all arms of federal,
state and local government in the 19th century. This was evident in the basic principles followed by
state and federal courts in labor, contract, property, tort,
negotiable instruments, trust, and corporate law. A primary example
was the defenses of contributory negligence, assumption of the
risk, and the fellow servant rule, that were accorded businesses
to shield them from negligence liability. ? |
|
|
Other prominent examples of state actions designed
to facilitate commerce include the franchising of "public
utility" monopolies and the creation of the limited liability
corporation. ? Many historians view the nation's Constitution as a document that was primarily concerned with facilitating commerce. Be that as it may, the Constitution has many provisions specifically designed to facilitate commerce, and the facilitation of commerce is obviously one of the document's most important concerns. ? The Constitution provides for federal involvement with patents and copyrights, bankruptcy law, weights and measures, the post office and post roads, and the uniform and non preferential regulation of interstate commerce. ? The protection and facilitation of interstate commerce was a constant preoccupation of the federal government. It provided active assistance to railroads, settlers, and colleges. There were tariffs, police and military protection of persons and their property, the maintenance of political stability, and the training of engineers at West Point. Wars were fought against England, Mexico, and the native Indians to further economic interests. The Civil War may have been as much a controversy over economic issues, such as the tariffs that favored northern manufacturing, as over slavery. ? Above all, there was the maintenance of sound fiscal and monetary policies that protected the integrity of the monetary unit and national credit. The cornerstone of government economic policy during the first 150 years of the nation's existence - a period that saw the United States become the wealthiest and economically most powerful nation in the world - was the policy of monetary integrity and balanced governmental budgets. ? This is hardly a picture of a "do-nothing" economic policy. Rather, it is a picture of the nation's governments actively regulating economic relationships and doing whatever they could to create an environment conducive to economic prosperity. One can - and certainly should - question many of the individual aspects of this policy, but there can be no question of its overall success. |
|
|
|
The nebulous concept of "social justice"
is invoked to support the liberal agenda. Liberals oppose the
conservative agenda by claiming that it will "hurt the
poor." Their "fairness" propaganda
slogan has been most successful in justifying high marginal tax
rates and other tax policies that have dangerously distorted
the economy - and play a significant role in the formation of dangerous debt
bubbles and capital expansion bubbles, and cause the wastage of vast sums. ? |
|
|
These 20th century propaganda slogans are just as
artificial as their 19th century predecessor. They are totally
without functional definition. ? The "social justice" slogan, for example, can be used with respect to any and all social problems that can be found within our all-too-imperfect society. It in essence justifies an unlimited expansion of government - an effort to provide a government response to every perceived social problem everywhere - regardless of the disastrous economic consequences that may flow from the resulting increases in government absorption of scarce financial and economic resources or resulting increases in government burdens on commerce. ? All of these slogans are used for the basic propaganda purpose of defeating measures opposed by liberals or supporting measures favored by liberals for a variety of reasons having nothing to do with fairness, justice, or effect on the poor. The beauty of such propaganda ploys is that they are great 10 second sound bites. They are simple to state and can be used to dispute political and economic points without having to deal with the merits of the issues or reveal the real reasons for opposition or support. ? |
|
|
The "social justice" propaganda slogan
has been particularly pernicious. Its use as a weapon against
our most fundamental ideals - political and economic freedom
and individual liberty and limited government - is unfortunately
still not widely understood. ? By inducing people to concentrate on the inadequacies of democratic societies and capitalist economic systems - rather than on the massive benefits of the freedoms and individual independence that they provide - the cry for social justice has become one of the primary ideological weapons of the opponents of political and economic freedom. It is invariably used by the demagogues who historically have posed the greatest danger to capitalist and democratic systems. ? By constantly expanding the ill-defined boundaries of the definition of social justice, the forces of democracy can be opposed, or existing democracies can be driven into political demagoguery, and justification can be provided for the destruction of free markets. ? Opportunist political leaders, elected on the basis of promises that cannot indefinitely be kept, have caused democratic governments to become vastly overextended, draining their dwindling financial resources in the constant effort to perfect that which is not perfectible. This occurred even in the United States, where Lyndon Johnson's "Great Society" programs drove the nation into the turmoil of double digit inflation, interest rates, and unemployment, until ultimately leading to the depression of 1980 - 1982. ? Today, we see a junior version in the way the Gray Davis administration has reacted to California's energy problems. ? Where political freedom does not exist, the fact that democracy doesn't automatically provide all that may be deemed required for social justice has become an important part of the propaganda myths that support modern despotisms of every stripe. It serves to shield despots from the otherwise powerful ideological attractions that political freedom and individual liberty hold for their captive peoples. ? Man is, of course, inherently flawed. He is neither perfect nor perfectible, and his social, economic and political arrangements are, at best, the sum of all his weaknesses as well as of his strengths. ? The drive for social justice concentrates on the hole instead of the doughnut. The very real benefits of political and economic freedom and individual liberty, and the safeguards of limitations on the powers of government, are lost or undermined because of intolerance of and ignorance about systemic limitations. ? The drive for social justice can become an insane, rule-or-ruin effort to achieve the impossible. It has, in the past and at present, created political pressures that fuel ruinous inflation in existing democracies, and it has been and continues to be an excuse for despotism throughout the world. ? |
|
|
The "fairness" and "hurt the poor"
propaganda slogans are used primarily - and very successfully - to oppose conservative efforts to reduce or limit the size of
government or the tax and regulatory burdens imposed on the economy. ? Government employee and teachers unions are today liberalism's core constituencies. Thus, liberalism favors big government regardless of the justice, fairness, or impact on the poor of the burdens that big government imposes on the economy. ? |
|
|
The truth of the artificiality of these propaganda
ploys is revealed starkly by the selectivity of their use.
Although all efforts toward fairness, social justice, and help
for the poor obviously depend on the nation's prosperity, no
modern liberal appears worried about the adverse economic impact
of big government. They ardently oppose even the repeal of such
noxious tax provisions as the marriage penalty, the double taxation
of dividends, and high marginal tax rates. ? Rent controls and the removal of legal support for landlord property rights have destroyed the low cost rental apartment industry in many areas, but liberals frequently still support such measures. Despite their obvious adverse impacts, price control programs still find favor in many liberal circles whenever liberal policies cause significant price inflation. ? Employment opportunities needed by the poor, and everybody else outside the government, are invariably limited by the increased costs, regulatory burdens, and liability risks of programs and policies favored by liberals. ? Social engineering efforts and teachers union labor policies have in many places destroyed the effectiveness of the public schools on which the poor are completely dependent for the education of their young. Nevertheless, the liberal educational elite continues to press these programs and continues to support the interests of the teachers unions against the interests of the students. ? Criminal law reforms destroyed the effectiveness of the criminal law, created jungles in the poor sections of many cities, and thus foreclosed any possibility of economic development - with or without government assistance. The liberal elite still zealously opposes the efforts that have rolled back many of those reforms and restored the effectiveness of the criminal law and the economic prospects of many cities. ? But let someone advocate economic deregulation or a reduction of futile and wasteful government programs, or a reduction in the tax burdens that restrain and distort the business and commercial activity that the nation is completely dependent on for direction in the effort to provide sustainable, non-inflationary economic prosperity, and the liberals come out in force, all across the nation, shouting their favorite propaganda slogan of the moment - asserting that the action they oppose is "unfair," or "unjust," or that it will "hurt the poor." ? Above all, they willfully ignore the fact that the distortions and burdens of our tax and regulatory system can undermine economic prosperity, and will obviously "hurt the poor," and cause more "unfairness" and "social injustice" during the next substantial recession than liberal programs can possibly deal with. |
|
|
The pejorative phrase "trickle down"
has been applied to efforts to facilitate commerce by reducing
or limiting burdensome government taxes or programs. Objections
to "trickle down" economic policies are an important
part of the "fairness" propaganda myth. ? |
|
|
No one can doubt that "trickle down"
policies work. Policies that benefit commerce benefit everyone
engaged in economic activity - from the captain of industry to
the unskilled worker - and provide the wherewithal for government
programs. Two hundred and fifty years of industrial revolution
have proved this fact beyond any reasonable doubt. ? Moreover, benefits that at first merely trickled down eventually became a stream and then a flood that increased living standards for everyone and provided the wherewithal for tremendous national strength. In the United States, those defined as "poor" today live better than all but the most wealthy during the 19th century. ? The only possible objections are that efforts to facilitate commerce take a long time to begin working, and distribute benefits very unevenly. ? What liberal opponents of these programs strive to overlook, however, is that benefits aren't the only things that trickle down. Burdens imposed on commercial systems and the capital formation process also trickle down to adversely affect all economic levels. Fifty years after the initiation of the New Deal, the burdens of liberal economic and social programs had accumulated to the point where the trickle of economic adversity had become a stream that provided double digit economic miseries. In many nations, the noxious effects of similar policies have been known to reach flood proportions. ? The liberal alternatives that favor immediate increases in consumption - both private and government - at the expense of investment and production, thus have to be doomed to ultimate failure - and economic theories that dispute this obvious fact have to be invalid. ? It's as true as the biblical injunction that you can only reap what you sow. "Trickle down" economic policies work - both for good and for evil - a fact that we ignore at our peril. |
|
Inflating your way out of inflation: |
Certain "supply side" views have,
in recent years, done much to poke holes in the nonsense incorporated
in conventional Keynesian economic wisdom about "monetary"
and "fiscal" policy. However, some "supply side"
advocates have adopted some
nonsense of their own. ? |
|
After the initial pleasant stimulation, inflation invariably causes increasing rates of unemployment.
Isn't it interesting how long term rates now rise as the Fed pushes its short term rates down. |
They criticize the central bank for
restricting the growth of the money supply and allowing interest
rates to rise. They claim this prevents the economy from growing
its way out of its problems. They assert that the central bank
should not be concerned with inflation until the rate at which
prices are rising actually begins to accelerate. This is like
putting off treatment of ill health because: - "Death is
nature's way of saying, it's time to slow down." ? Unfortunately, history has been invariably unkind to those nations that have attempted to inflate their way out of inflation - or out of any other problems. As stated, the initial economic stimulation is always pleasant - and always addictive because it is initially pleasant but very painful to stop. After the initial pleasant stimulation, inflation invariably causes increasing rates of unemployment. Massive international payments imbalances, the expenditure of financial reserves, rising prices and interest rates invariably follow - ultimately building to the point of economic and - sometimes - political crisis. ? These supply side advocates have forgotten that "inflation" is a monetary phenomenon. It is the expansion of the money supply itself that is the "inflation." Price increases and interest rate increases are just results of monetary inflation that occur after monetary inflation has become well established - and painfully difficult to reverse. Interest rates react to market interference in the same manner as any other prices. The surest way to get higher interest rates is to try to push them down. ? Isn't it interesting how long term rates now rise as the Fed pushes its short term rates down. |
|
The vanishing multitudes: |
Recent conservative political victories have
led many ardent conservatives to the erroneous conclusion that
there is a conservative majority in the country waiting to be
tapped by any suitably attractive conservative candidate. This
is an obvious delusion. ? |
|
|
The electorate may on occasion vote for truly conservative
candidates, but there is clearly no broad-based emotional attachment
to conservatism. The electorate really only becomes emotionally
attached to those candidates who promise them benefits from the
public treasury. ? The 1980 conservative victory was, primarily, a vote against the previous dominant liberal government which - after half a century of unrelenting effort - finally succeeded in destroying the nation's criminal law protections and economic health and thus proved the invalidity of government activist dogma and the incompetence of liberal government. The conservative victory in 1994 was primarily the reaction of a suddenly frightened electorate that suddenly understood what it might mean if liberal government succeeded in grabbing complete control of all of their vital health care industry. It was also the reaction of southern conservative voters who finally put the Civil War behind them and accepted the fact that there was no place for them in the Democratic party. ? In short, real conservative victories - of candidates committed to efforts to limit or reduce the size of government - only occur when the electorate becomes fed up or frightened about inevitable liberal screw-ups. ? Conservative ideological victories in reversing liberal trends in government economic management, criminal law, welfare, and military preparedness, have come only after the public could no longer ignore the disastrous implications of pertinent liberal programs and policies. Tax burdens, too, have reached their political maximum. ? But liberals now generally accept the need to submit to the "golden straitjacket," and are committed to balanced budgets and a stable currency. This leaves them free to use the surplus revenues of a thriving economy for any of the infinite societal "needs" that may prove attractive to the voters. The voters may still be wary of new taxes, but the voters still love to receive goodies from the public treasury. The tide of recent conservative political victories has been accompanied by unparalleled economic prosperity - and a vast acceleration in the growth of government at federal, state and local levels, regardless of the political party in power. ? The nation's political system and economy have been able to survive the worst ravages of political demagoguery, even while locked in mortal combat, - a forty five year war of financial attrition - with the Soviet Union. Demagoguery remains the most dangerous threat to democracy, but our political environment has evolved to limit the worst damage that such demagoguery can inflict. However, demagoguery still wins votes from a credulous public - and both political parties now compete for election on the basis of promises for new or expanded government programs. |
Please return to our Homepage and e-mail your name and comments.
Copyright © 2001 Daniel Blatt