Jobs: Desperation In The White House

“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.

Paul Krugman, for example, is apoplectic about the “extremist” Tea Party Congressmen, and says we are making a huge mistake:

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.

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12 comments to Jobs: Desperation In The White House

  • dd

    hi Jeff,

    excellent piece, i enjoyed this one in particular. to those sniping, i suggest they have their heads examined as your writings have been proactive and far from passive. your opinion has been clear all along.

    all the best to DoctoRx (i look forward to your return) and Keith. the more the better!

  • mitch

    By propping up bad banks and bad companies, and by prohibiting capital from being redirected to viable economic activities, this stimulus bill will drag out the economic pain and lead us into serious stagnation. The actual cost to us will be tremendous in terms of wasted capital, lost opportunities, human misery, and a large slice of time.

    -jeff harding feb 17 2009

  • Chris Goodwin

    “Getting the unemployed back on the job, lifting their wages”

    I thought that the market works the other way; higher wages/less jobs, lower wages/more jobs.

    Obama obviously doesn’t “do” economics.

  • Linus Huber

    This is a good article and explains some important aspects that Keneysians completely ignore.
    Credit is an item with a price and over the past many years, its price has been reduced so that people took more and more of it until about 2007. But as with everything else, there is a point of saturation at which no matter how cheap an item is, you simply do not buy or take it on anymore. The saturation point has been exceeded exessively, no one would have expected this could happen 20 years ago.
    In addition, we have presently a system that allows the big players influencing policy in a way as never before. Seemingly all for avoiding job losses. But as longer we allow those major companies to basically rig the system in their favour we avoid the creative destruction that allows new firms to be formed and new ventures to be successful. It is new ideas and new ventures/firms that create jobs not the large firms. The longer we delay this cleaning of the system of the dead wood the worse the situation will turn out to be. Everyone is afraid of the write downs that have to be faced and so the can is pushed down the road again and again. Trichet and Bernanke promote this with their idea of trying to save the present system at all costs. I am certain that in the years to come they will be hated and treated like criminals that they actually are. Because the costs of all this will clearly fall onto the common tax payer and guy who depends on government for their daily life.
    The Western Society is built on the principle of the RULE OF LAW. Over the past few years the spirit of the rule of law has been violated in the most serious manner; all to the benefit of the few at the expensive of the many. It takes time for people to realize the crime inflicted on them but once they will realize or start to think to know what and who is responsible for their plight, there will be a corresponding backlash that will shake the system. I am just waiting for the political fall out of this great theft perpetrated in favor of those few

  • ohioralph

    Linus, I respect your analysis however you must recognize that Western Society is built on spontaneous order and voluntary exchange not the RULE OF LAW. RULE OF LAW is a creation of our government structure which has also enabled the intervention into all markets thereby distorting voluntary exchange. As this has occurred malinvestment has followed giving us the stagnation that we have today.

    The solution is liquidation or restructuring via bankruptcy but political fall-out is holding it back. This is a catch 22 scenario that
    requires an enlightenment that is lacking in our society.

  • Thom

    As regards ““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.” Fact is 2011 is not 1946 (frankly nothing has ever been like 2011 in this country. So IMHO that alone ends any counter theories to the fact that this is different.

  • Onlooker

    The reason they cling to the failed and flawed models, of course, is that those “experts” give them cover to continue to spend money (which is power) and give power to government instead of all those greedy people out there trying to make money for themselves (etc., ad nauseum).

  • bryson Randolph

    As to the above ,it is clear that the effects of fiscal and monetary policy is relatively insignificant relative to the impact of the household sector. The corporate world for the most part is thriving with continued annual increases in profitability .
    as long as these goals are achived with out increased hiring there will be no motivations to rock the boat. It is hard to see a scenario wherby increased hiring becomes a valid and necessary tool for increased corporate profitability.
    Until there is motivation to hire to improve pofitability it seems unlikely that we will see much if any improvement in the job market and thus the spending capability of the “household sector”.
    Unfortunatly There are probably not any fiscal policies or monitary policies which can create a an appropriate motivation for corporate hiring.

  • Mark

    I am now reading “Dreams from my Father” for the first time. It’s crystal clear that Obama hates business, especially American business. This is a quote from when he got a job at a major (unnamed) consulting firm: “Like a spy behind enemy lines, I arrived every day at my mid-Manhattan off…”

    We will never return to prosperity until he, and his circus of “progressives”, are long gone.

  • dd

    my only wish is more people had read “Dreams” before the election. America wanted change and it got it.