Historic Grumpiness

I am not sure how to react to the drift of events. It seems as if our leaders, both here and in Europe, are determined to re-create the Great Depression. I guess it must have been fun the first time through. While else would they be so steadfast in their lunacy?

We live in absurd times. We are lead by fools. Our commentariat is stupid, ignorant, badly educated, or simply to darned lazy to pick up a history book. It surely isn’t difficult. Even I can do it.

Boy, am I grumpy.

I crossed the line today when I came across a piece in the Washington Post by the now less than notable – in my mind – Robert Samuelson. His article attempts to provide a critique of Keynes. The conclusion being that Keynes would repudiate Keynesian policies in the supposedly debt ridden world of today. You can read the article yourselves, I am too annoyed to provide a prÌ©cis here. Suffice to say Samuelson succeeds only in displaying his ignorance both of Keynes and of recent history.

His argument is, as my father would say: utter tosh. Twaddle. Of course it doesn’t help my distemper to have spent the prior weekend re-reading Minsky, but let that pass.

We are living through an epic repudiation of classical economics in all its varied guises. In my more aggressive moments I wish that the Swedes, or whoever it is that doles out the faux Nobel prize for economics, had a recall button. The embarrassment of an entire generation of economists is on display before us, but instead of a scientific reaction – a healthy change of mind in view of their failure – we are being subjected to a petulant, nay petty, rearguard action wherein the orthodox true believers throw hissy fits of hate against the one theoretical construct that has, with flying colors no less, stood up against that facts.

Keynes has been vindicated. Not repudiated. Knowing as we do that Keynes was hardly a shrinking violet and was certainly not too shy to claim righteous victory for his ideas, it would shock me to the core to hear or read him walk away from his theories in their time of victory.

Have I made myself clear?

Whatever flavor of Keynes you adhere to, and this is not a moment to parse them apart, the basic constructs have supplied us with both analytical power to explain events, and policies to improve our lot or to solve our problems. That our leadership cannot or will not embrace those policies is a source of frustration for all those advocating them. Ideological blocks are preventing us applying the cure. But that we know the cure is clear.

Let’s get this straight:

1. Printing a wad of money right now will not have an impact on inflation. Evidence: it hasn’t yet, despite the torrent of money flooding into the economy. Last Friday’s inflation numbers showed core inflation of 0.2% – the upward spike in commodity prices from earlier in the year are still rumbling through the system. Headline inflation was flat. Flat. Narry a surge in sight. Not one whit of hyperinflation. So, why I wonder, are we still warned that inflation is “just around the corner”and that all that money will absolutely throw us into a Weimar style disaster? We have been thus warned by the hardliners for three years straight. They have been utterly wrong. Also for three years straight. After all that error one would have thought a little introspection is called for along with a modicum of contrition. But no. We get the same argument trundled out one more time. At some point inflation will certainly rise, and, like the proverbial broken clock, I assume they will claim victory for their falsified idea.
2. More evidence: throughout this crisis we have been told that the markets, vaguely defined as creditors holding sovereign debt, will run for the hills as the debt issued to fund deficit spending piles up. Just you wait, argue the hawks, interest rates are about to rocket skyward and we will not be able to fund ourselves any longer. What happened? US rates have fallen. They are low. Very low. Creditors are falling over themselves to buy US debt. Somehow they don’t seem to worried. They are running towards, not away, from the US Treasury. OK, say the hawks, how about those Europeans? They seem to be having funding difficulties. Yes they are. But not because of poor fiscal management. The markets are not scared of the debt. They are scared of the the pickle that a poorly integrated fiscal union is having. Countries with balance of payment problems – Spain for example – cannot adjust their economies when they remain locked with others with the exact opposite imbalance. So they have to throw themselves into austerity measures far more draconian than the original problem required. And, let the record show, the Spanish were paragons of fiscal rectitude before the crisis, they were not spendthrift. Not at all. Instead, the Euro is acting in the same manner that the old gold standard did. Anyone tethered to it is suffering. External adjustment is not possible, so all the adjustment has to be made within. That means lower wages, deflation, and recession. In turn this means paying off debt will be more, not less difficult. Austerity leads to contraction no matter how you spin it. And, anyone with even a smidgeon of historical awareness knows that, back in the 1930’s, the countries that abandoned the gold standard early were also those who recovered early. They were unshackled and could adjust. Thus the UK recovered well before the US or France, despite its similar problems. Heroic austerity is simply another description of stubborn self defeating folly.
3. This latter point deserves to stand by itself: austerity is just that. Austerity. Slashing away at government spending reduces the economy in the absence of any offsetting private sector expansion. And the very reason that debt-to-GDP ratios have spiraled upward is because GDP has slumped while safety net spending has kicked into prevent a free fall. Economies can get stuck in a vicious squeeze when this happens. The response should not to be to dig the hole deeper, but to keep the cash flowing in order to buy time for the private sector to work out its kinks. If those kinks are debt related then the time needed – and the cost – will be accordingly high. In other words we need to induce growth, not suffer some latter day purgative episode of indeterminable length. This not a moment to savor a self inflicted bout of moral scourge and cleansing, but to find ways to re-build. That can take debt. Lots of it. Meanwhile countries that implement austerity are all, without exception, suffering unnecessarily. Unemployment has erupted wherever austerity has been applied. Imbalances are moving in the right direction, but only modestly and at great human cost. Apparently the people of Ireland are more aware of the truth than the hawks, they are voting with their feet. Irish emigration has shot up during the years of austerity. Meanwhile the Irish economy is shrinking, unemployment has reached about 15%, and all the indication is that the pressure is building not easing. The voters suffering at the sharp end of economic policy know better than those developing the policy. Austerity doesn’t work.

Thus, when we come across an article such as Samuelson’s we have to shudder at the enormity of its ignorance. Or it’s author’s willingness to avoid evidence. In polite company we don’t refer to it with the language it deserves. Elsewhere is another matter.

History will not treat kindly those who refuse to learn from this crisis. Millions of lives are being ruined because of a stubborn adherence by poorly educated experts and leaders to a set of ideas that have been totally falsified by events.

And those defunct ideas are not those of Keynes. Far from it. His ideas are still standing.

Capitalism, oh horror, turns out to be riddled through with internal weaknesses. Markets are not always self correcting. And, in honor of Minsky, the financial world is endemically unstable. Indeed the very strengths – don’t laugh, there must be some somewhere – of our banking system condemn it to periodic failure. Disruptions in one market can, indeed, leak over into others. Wages are sticky. Heck stuff happens – uncertainty really, really matters. The list goes on.

The list reflects reality. The list reflects Keynes. Or, rather, Keynes understood the list. Which means, for all his obscure writing and occasionally vague explanation, Keynes understood reality.

Which is why his ideas work. Which is way more than we can say for the other folks.

History. Facts. They can make you grumpy.