Classical economic theory and the American recovery

UPDATE ABOVE: Birthday pressies from the family who seem to know me quite well.

Modern economics explains to governments how they and their crony capitalist mates can steal from you while pretending they are doing you good. And before we go any farther, here is something you should know before you listen to another word from anyone in government: Government spending never creates a net increase in employment. Government spending only creates jobs in one place at the expense of jobs somewhere else, and does it by giving money to the government’s best friends to run projects no firm, based on profit and loss, would ever undertake. And if the project is loss making, which government projects almost invariably are, it has taken the economy backwards – that is, people in general invariably become less well off than they otherwise would have been had these projects not gone ahead – even if those to whom the government has paid money are better off, which they almost invariably are. Government spending, unless there is a genuine and calculated return above the cost, is a ripoff, and it is you who are being ripped off. They pick your pockets and pretend they are doing you good.

Let us look at the alternative. The turnaround in the American economy over the past year is astonishing and almost unprecedented; you might have to go back to Harding in 1921 to find a parallel. No modern macroeconomist can explain it. The supply-side of the economy is not only invisible to almost every economist miseducated today, but so far as their demented demand-side models go, is irrelevant to raising growth and employment. Here is what I wrote in November 2016, with the only bit I got wrong being how quickly things have turned around.

Getting a recovery from here, from within the mess that Obama has left behind, will be a task of such Herculean difficulty that only because Trump is president do I think it is even possible. And one of the most important virtues he may have is not listening to economists such as this one discussed in the article at the link: The brilliant economist who designed the failed 2009 stimulus plan tells us that Donald Trump’s economic plans are going to fail. Here we are dealing with Harvard economist, i.e. Keynesian economist, Lawrence Summers, about whom the article states:

At this point, we have to note that the esteemed Dr Summers was the architect of President Obama’s 2009 stimulus program, the American Recovery and Reinvestment Act of 2009, an $831 billion boondoggle which was promised to hold unemployment to a maximum of 8%; it reached 10.0% in October of 2009, and stood at 9.2% in June of 2011, when it was projected to be below 7%. There are many economists who still justify the stimulus bill by saying that while the effects of the recession were worse than estimated, they’d have been worse yet without the ARRA. That, of course, is unprovable, but when the designer of such a huge, failed program tells me that someone else’s economic plans won’t work, I have to look at his statements with a jaundiced eye.

Trump has spending plans of his own that aside from The Wall, which if it significantly reduces the size of the American welfare bill may pay for itself many times over, will also add to the burdens on the economy. But he also intends to cut energy costs, improve decaying infrastructure, free up the regulatory framework that suppresses industry, renegotiate trade deals that are intended to work for American industry, and lower government outlays generally. He will also remove Obamacare, which has raised the cost of full-time employees, while lowering the cost of health insurance. Interest rates will also start to rise which should assist in the shifting of resources into more productive areas of the economy, and will also add to the willingness of many to save.

I definitely do not say it’s easy, and no one can guarantee things will turn round rapidly enough to show results soon enough to work politically, specially in the midst of the hostile media circus Trump will have to deal with. But at least I feel that for the most part the changes that will be introduced will generally shift things in the right direction. Here is the alternative Summers has in mind:

I have long been a strong advocate of debt-financed public investment in the context of low interest rates and a decaying U.S. infrastructure, so I was glad to see Trump emphasize it. Unfortunately, the plan presented by his advisers, Peter Navarro and Wilbur Ross, suggests an approach based on tax credits for equity investment and total private-sector participation that will not cover the most important projects, not reach many of the most important investors and involve substantial mis-targeting of public resources.

There is no learning from history other than that economists never learn from history. You also know that Congress will fight like cats to maintain expenditure since that is almost entirely what they have to maintain their support. Whether there is a constituency for re-building the private sector is still to be discovered, but at least with Trump you know he will want to try.

You really do have to wonder whether economists will learn a thing from what they’ve just seen. Given the experience of the past, there is not the most remote chance in the world that they will. But what you’ve seen has been the result of following classical economic policy – the economics of John Stuart Mill – in just the way it would have been done before Keynes published his General Theory, a book that has destroyed the coherence of economic theory for three generations of economists and counting.

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29 Responses to Classical economic theory and the American recovery

  1. W Hogg

    Larry Summers makes Krugman sound sensible. I think I met him at a conference where he was exhibiting Recurring Extreme Trump Acceptance Resistance Disorder. He was going on about T666 going to start a nucular war or something. I asked him how the Stable Genius Kenyan was going with his 3 failed regime changes in MENA plus pushing Russia closer to war than in 30 years. He conceded I had a point but T666 (who at that point hadn’t been inaugurated yet) was worse.

  2. overburdened

    I would humbly recommend Scott Adams’ blog re the POTUS approval rating for a more concise appraisal.

  3. Zatara

    Government spending never creates a net increase in employment.

    Is war an exception to that then?

    The 1940 the percent of US civilian labor force employed was 85.4 as they ramped up to war. In 1945 it had increased to 98.1%. See table 3 here.

    Those number don’t include the 12 million who volunteered or were conscripted into uniform but surely they must be included in any net computation.

  4. Herodotus

    And we still have the ALP and their cheer squads in the media banging on about how they fixed up things after the GFC by throwing taxpayers money at anything and everything.
    It’s as big a lie as global warming.

  5. Iampeter

    I don’t think the economy has done any real recovery since 2008 since the interest rates are still around 1% and far, far too low. Once they get high enough the bubbles re-inflated since 2008 will burst and the economy will collapse again just like 10 years ago.
    There has been no serious deregulation of anything and all the same causes are still in place and in fact the state is even bigger and more intrusive (think Obamacare which we now know no one is going to repeal and all its additional burdens as one obvious example).

  6. manalive

    There is no learning from history other than that economists never learn from history …

    In his book To Hell and Back (2015) eminent historian Sir Ian Kershaw remarkably doesn’t mention Ludwig Erhard, nor ‘Ordoliberalism’; he attributes West Germany’s remarkable post-WW2 economic recovery solely to Keynesian-Galbraith government stimulus.

  7. Defender of the faith

    Kates is not demented (though most economists are today). He just thinks the trump wall is s good investment that will pay for itself. Outstanding.

  8. Tel

    Let us look at the alternative. The turnaround in the American economy over the past year is astonishing and almost unprecedented; you might have to go back to Harding in 1921 to find a parallel. No modern macroeconomist can explain it.

    September 2015 was the low point in employment participation, it’s been on the way up since then (although nothing spectacular, and not rising anywhere as rapidly as it was falling a while back).

    https://fred.stlouisfed.org/series/CIVPART/

    I would say the turnaround year was 2016, and I would give some credit to the Tea Party for managing to get the US government “sequester” installed (OK, it was small but when it comes to keeping government spending under control, every bit helps) and some credit goes to Yellen for doing the right thing in the face of many insults and raising interest rates.

    And yes, there’s been a Trump mini-boom, but at this stage it’s mostly just high hopes and enthusiasm, and quite frankly I don’t see a whole lot of substance to it… not yet at any rate. Happy to be proven wrong.

  9. Tel

    Interest rates will also start to rise which should assist in the shifting of resources into more productive areas of the economy, and will also add to the willingness of many to save.

    Peter Schiff has a point, the US government is deeply indebted and they must pay to rollover this debt, so as interest rates rise the government budget will get smashed with growing interest payments.

    There’s going to be a crunch when government looks at the Fed and says, “Hey no more rate rises because we can’t afford it” and the Fed says, “We need to rate rises to protect the USD from collapse and to control inflation.”

    At that point it will be a tricky negotiation. The Fed might just back down and let inflation run… that would be the easy option.

  10. Herodotus

    He just thinks the trump wall is s good investment that will pay for itself. Outstanding.

    You realise we’re just talking about an existing wall that needs extensions and renovations?
    And that they aren’t as fortunate as we are in having oceans instead of a wall?
    And perhaps having an opinion that open borders are not economically beneficial could have some element of sense?

  11. Mark A

    Iampeter
    #2610884, posted on January 16, 2018 at 7:21 am

    I don’t think the economy has done any real recovery since 2008 since the interest rates are still around 1% and far, far too low. Once they get high enough the bubbles re-inflated since 2008 will burst and the economy will collapse again just like 10 years ago.
    There has been no serious deregulation of anything and all

    Whom to believe?

  12. Mother Lode

    He was going on about T666 going to start a nucular war or something.

    Don’t these zebes believe that war is good for the economy? All that delicious spending!

  13. struth

    TDS mildy, or like Malcom or Luscious has it, is quite a phenomenon.

    Here they sit in one of the world’s great socialist shitholes, tut-tutting Trump.

    Please dear lord, please send Australia a Trump.
    Please.

  14. Peter

    “There is no learning from history other than that economists never learn from history.”
    But then again neither does anyone in the West. Particularly now – we have allowed and condoned the replacement of the study of history with study of ideology, meaning that instead of learning facts, kids today learn Leftist memes. So when they grow up they will consistently fall for the Leftist lie that the way to create wealth is taxing it then giving it away to those who’s votes they desire.
    But I should not be too hard on today’s kids for ignorance which admittedly is not of their own making. Everyone behaves this way. Churchill, in a different context wrote in 1934 that:
    “There is nothing new in the story. It is as old as the Sibylline books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong—these are the features which constitute the endless repetition of history.”
    The “confirmed unteachability of mankind”. Yep, that about sums it up.

  15. Defender of the faith

    Herodotus: two points. First, Kates literally said so in a piece that essentially contradicts the thesis. Second, I’d like to know what open borders are. If you mean that immigration is restricted then I don’t know that many countries are more restricted in their controls than the US. Of course they have borders with Mexico and Canada. A wall won’t stop anyone. It’s just a big expense for purely rhetorical purposes. A Canadian wall will be even more expensive.
    Kates is neither a conservative nor a libertarian. He is totally up for very large government but only for his pet grandstanding projects. He is opposed to liberty. He also favours a president who disavows every conservative principle, from public manners to truth telling.

  16. Jonesy

    History in Australia says otherwise….why were ALL our utilities paid for with tax money? Was Australia, with a postwar population of less tham 15 million, too small to invest in? Take names like CSL, CHEP and CIG…that C is for Commonwealth. CBA is a whole different story but it was still! PMG and telephony. All our roads and rail, Power stations and coal mines. Water infrastructure. I remember reading once that the US thought us socialists because ALL our utilities were state owned but where was the private enterprise when we needed it most? Does the kids story Henny Penny fit the reason why there seemed to be little appetite to build any utility in Australia…or was our government too strung out being in control? To attract ANY industry we had to build the infrastructure to attract development….why? Were we so much of a backwater? If it wasnt for foreign investment in the sixties and seventies we would not have reaped the rewards of the nineties and noughties.

    I want to beleive in the free market but in the case of this nation, post war we were being left behind. Why? Too small or the wrong legislation in place?

  17. mh

    Bombshell Report Reveals Up To 30% Of Federal Inmates Are Illegal Immigrants

    The Department of Homeland Security (DHS) has released its findings on the immigration status of federal prison inmates, as mandated in a controversial Executive Order signed during the President Trump’s first week in the White House. The report reveals that of the 37,557 confirmed immigrants in the federal prison system, 35,334 (94%) of them are in the United States illegally – which means out of a total of 185,507, federally incarcerated individuals, over 19% are confirmed illegal immigrants – which, in 2014, cost U.S. taxpayers $1.87 billion to house.

    It should be noted that the 19% figure is based on known illegals in federal prison – while 58,766 individuals are “known or suspected” to be illegal. If we apply the 94% confirmed illegal rate to the “known or suspected” population, it brings the total number of potential incarcerated illegal immigrants to 55,240 – or 30% of federal incarcerations.

  18. will

    too brilliant to be not worth repeating.

  19. Tel

    All our roads and rail, Power stations and coal mines.

    Wrong, Parramatta Road was originally paid for by a turnpike trust… much the same model that the NSW government has finally come back to after 200 years.

  20. Tel

    To attract ANY industry we had to build the infrastructure to attract development….why?

    Also wrong. Early shipbuilding in the Newcastle area was private, because the harbour was good and there were plenty of trees (back when ships were made of wood). Only later did government start to get involved, ultimately building up a lot of extra infrastructure that got “captured” by unions and now sits idle.

  21. OldOzzie

    Because the World is full of idiots and our kids are being brainwashed like this

    NAACP Says MLK’s Vision Can’t Be Achieved Without Fighting Global Warming

    From the Comments on that Article

    John (magnum) ScottPM • 12 hours ago

    The Arctic Ocean is warming up, icebergs are growing scarcer and in some places the seals are finding the water too hot, according to a report to the Commerce Department yesterday from Consulate at Bergen Norway.

    Reports from fishermen, seal hunters and explorers all point to a radical change in climate conditions and hitherto unheard-of temperatures in the Arctic zone.

    Exploration expeditions report that scarcely any ice has been met as far north as 81 degrees 29 minutes.

    Soundings to a depth of 3,100 meters showed the Gulf Stream still very warm.

    Great masses of ice have been replaced by moraines of earth and stones, the report continued, while at many points well known glaciers have entirely disappeared.

    Very few seals and no white fish are found in the eastern Arctic, while vast shoals of herring and smelt which have never before ventured so far north, are being encountered in the old seal fishing grounds.

    Within a few years it is predicted that due to the ice melt the sea will rise and make most coastal cities uninhabitable.

    * * *

    * * * * * *

    I must apologize.

    I neglected to mention that this report was from November 2, 1922, as reported by the AP and published in The Washington Post – 94 years ago.

    This must have been caused by the Model T Ford’s emissions or possibly from horse and cattle flatulence?

  22. Confused Old Misfit

    Jonesy
    #2611017, posted on January 16, 2018 at 11:01 am
    … I want to beleive in the free market but in the case of this nation, post war we were being left behind. Why? Too small or the wrong legislation in place?

    The wrong legislation in place. Unions protected by legislation. Business will invest where it can see making a profit.
    Ask yourself why, until fairly recently, hot water tanks were up in the roof and the pressure was only a head of 6 ft or so. Why were they not at mains pressure? When I immigrated in ’81 I was astounded that this was so.

  23. Ez

    The Fed might just back down and let inflation run… that would be the easy option.

    Assuming there is troublesome inflation in the near-term.
    Fly made a good observation at iBC: If Inflation is Such a Threat, Why Aren’t TIPs Moving Higher?

    Perhaps the recent data out of the US is the beginning of supply-side lead growth? (improving employment market, etc)

    As you know, the demand for employment is not the same as demand for commodities; so you’ve got a lead-indicator of growth and any inflationary pressures are likely further down the road anyway.
    The tax cuts, along with interest rates inching up, should (as Steve mentions) assist the productive economy.

    Edging rates higher (now) will also give the US some breathing room to reduce rates (in future) should things really begin to overheat.

    If all continues according to script, a Keynesian explanation for what is happening will make fascinating reading 🙂

  24. RobK

    Steve,
    I also have a MAGA cap, given to me by my son on return from a trip to NY. Im not sure of when is a good time to wear it but the anticipation of such an occasion arising keeps me amused in quiet moments.

  25. RobK

    Oops, i see Steve’s is a MEGA cap. I dont qualify for one of those.

  26. Aqinas

    Kates is not demented (though most economists are today). He just thinks the trump wall is s good investment that will pay for itself. Outstanding.

    If it keeps just one person from a shithole getting into America then it has paid for itself.

  27. classical_hero

    RobK, I’m pretty sure he’s got a MAGA hat also.

  28. Anita

    UPDATE ABOVE: Birthday pressies from the family who seem to know me quite well.

    LOL. Happy birthday Steve.

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