“My concern right now—my singular focus—is the American people. Getting the unemployed back on the job, lifting their wages.”
Those words by President Obama reflect a certain desperation as his Administration and the Fed search for answers to the problems that vex politicians the most – the economy, specifically, jobs.
Add on to this the S&P downgrade, and we have an Administration frozen in the headlights of bad economic data.
Their desperation must be keenly felt in light of the fact that everything they’ve tried has failed them. Yet they still insist on doing more of the same despite their failures. To solve the unemployment conundrum he is pushing to extend the payroll tax cut enacted last year, to extend unemployment insurance, to give tax credits to companies which hire veterans, and to create an infrastructure bank to spur construction projects. As well, I believe the Fed will eventually engage in more quantitative easing, even though QE1 and QE2 were policy failures.
I would guess that most of his economic advisers are just as frustrated because Keynesian spending by the government to spur economic activity, their main tool, was sacrificed in the budget compromise.
We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.
The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.
The facts don’t support Professor Krugman and his faith-based economics. Professor Russ Roberts pointed out in response that:
… in 1946, federal spending fell about 55% when the war ended. The Keynesians predicted a horrible depression. Yet despite the release of 10 million people into the labor market with demobilization private sector employment boomed and the economy thrived.
Also, Professor Roberts noted that no one else has been able to find those studies Krugman refers to.
At this point one would think the Administration wouldn’t listen to anyone who has been giving them economic advice, especially Ben Bernanke, Tim Geithner, Austan Goolsby, Gene Sperling, Paul Krugman, or whomever they rely on. If what you’ve tried over and over hasn’t worked, one would think they would question their ideas and try something else. Alas, no.
I will come right out and just state the obvious: Keynesian fiscal stimulus hasn’t worked, has never worked, and never will work. I challenge anyone to prove me wrong. Those who say, it worked in 2008 because things would have been much worse without it are wrong. They don’t understand economics or logic. Post hoc ergo propter hoc. Or, because A happened and then B happened, A must have caused B. Bad logic and worse rhetoric. The fact is they can’t prove their case and they never will because their premise is wrong.
Bloomberg had an interesting piece last week about the Fed’s predictive ability. The bottom line is that none of their forecasts have worked. Ben Bernanke, as the great Jim Rogers likes to say, has never made a right call since 2008. The reporter states the obvious flaw about economic forecasts: they look backward to see the future:
The suite of models used by Fed staff to forecast changes in consumption and investment rely to some extent on past relationships between interest rates, income, and profits. Most also assume credit will be supplied and demanded at a given price or interest rate. Without adjustments, they revert to the mean — after a period of slump they begin to point upward, in line with previous recoveries.
All of those tendencies have made the models less trusty guideposts for what is happening in the current recovery. The staff has to venture judgments and explore new analyses.
The problem is that historical data isn’t going to predict what is going to happen tomorrow. If it does it’s probably a coincidence. So, if your data is “right” and your forecasts are wrong:
“Something new and different is going on,” said Allen Sinai, chief global economist at Decision Economics Inc. in New York. “Neither monetary nor fiscal policy is giving us the kind of bang we have traditionally got. The household sector is simply not spending as it has in the past.”
I would tend to agree with Dr. Sinai that something new and different is going on: their models are wrong because the theories are wrong. They just don’t know it.
At best, forecasting is a very broad brush thing. As Hayek (and Mises) liked to point out, econometrics is a “pretension” of science. That is, you can’t replicate the hard science when dealing with human behavior, especially in an economy where billions of economic decisions are made every day by individuals rather than “the economy.” Yet that is exactly what Keynesian econometricians at the Fed try to do and why they are mostly wrong.
The science of econometric forecasting is dangerous in the hands of policy makers because they think they can use the data to create policy that works. They’ve proven otherwise and their policies have been harmful to the economy.
In my lifetime the only ideas that have seemed to explained economic behavior accurately are those based on Austrian economic theory (ATE). I have tried to apply it to current events and it seems to have broad brush predictive accuracy and offers logical explanations of what is going on. Forecasts are hard enough because you are never quite certain you have the right data sets, but, with some humility, it’s pretty good at big picture stuff.
Before I am accused of sitting in my pulpit sniping at those honest economists toiling away to make America a better place, I have talked about what it will take for a recovery many, many times. For those who forget, you can start with this article, “A Plan For Economic Recovery.” The fact that we at the Daily Capitalist have forecast accurately the current economic decline, the coming downgrade, and the market chaos, I think gives us some insight into why things aren’t working.
The only way we can resume real economic growth is to cure the problems that are holding us back. Mainly that is the debt hangover from the malinvestment in real estate created during the boom phase of the last business cycle. Until that happens, we will continue to stagnate and there is not much President Obama or Ben Bernanke can do about it.