Catallaxy Files

You would think that the American economy was a shining light on the hill, an example to the rest of us, given the way that its President sees himself fit to tell others how to go about managing their economic affairs.

U.S. President Barack Obama will press European leaders to ease up on fiscal austerity and focus on economic growth at a summit on Saturday that will discuss ways to stem turmoil in the euro zone and head off the risk of global contagion.

How can they bear listening to him? How can anyone? One can easily see that the slowdown that will follow a proper restructuring of expenditure and genuine retraint cannot do much to improve his own re-election chances. Things are apt to get worse before they get better and it’s only six months till November. But if the Europeans are finally prepared to bite the bullet, there would be no worse advice imaginable than to have them postpone the inevitable.

‘Hopefully we’ll get some stuff done,’ Obama told Italian Prime Minister Mario Monti as he and other summit participants arrived for Friday evening dinner at a lodge at the secluded presidential retreat.

Obama earlier in the day aligned himself with Monti and new French President Francois Hollande by urging a solution to the euro zone crisis that combines fiscal belt-tightening measures with a ‘strong growth agenda.’

On the other side of the debate is German Chancellor Angela Merkel, who has pushed fiscal austerity as a means of bringing down huge debt levels that are burdening European economies.

I especially like Obama’s embrace of “fiscal belt tightening” just as the US is heading into yet another debate over raising its debt limit. The belt tightening, odd as it may sound to all those mis-educated economists, is the growth agenda.

The following cartoon, via Powerline, picks up some of the irony, but really there are no depths sufficiently deep on these matters.

It is quite an astonishing business that what it means to be part of the left is to wish to be left in willful ignorance rather than to confront the news. It’s not that they make every effort to know all that’s going on, but they seem to choose media which will specifically keep them in the dark. We who are surrounded by the ancestral media, even if we wanted to block out the unpleasant news couldn’t do it. If we watch, read or listen to the news at all, we find out pretty well everything that is being reported. But we also find out more. We also find out those other stories that the media of the left never report on and their constituency tends not to discover but which is covered by Fox say, or on the web.

Let me start with this example which will be a surprise to no one:

No sooner did the literary agency brochure in which Barack Obama was said to be Kenyan-born surface than the media went to work to deep-six it.

‘This was nothing more than a fact checking error by me – an agency assistant at the time,’ Miriam Goderich, now a named partner in the literary agency, Dystel & Goderich, wrote in an emailed statement to Yahoo News, which was then picked up ABC News. ‘There was never any information given to us by Obama in any of his correspondence or other communications suggesting in any way that he was born in Kenya and not Hawaii. I hope you can communicate to your readers that this was a simple mistake and nothing more.’

So the only time someone on the left finds out that Obama had self-reported himself for fifteen years as Kenyan born it is softened for them by being part of a story in which someone else takes the blame. You have to be an idiot – someone who might believe Craig Thomson, for example – to believe this woman. But for someone coming across the story for the first time, it is not as a news report about how Obama had stated that he was born in Kenya but is in a story in which the point is already being denied.

And then having read that I came across these in short order:

Politico Covers Up Obama Campaign’s Alleged Attempt to Bribe Rev. Wright

The Crucial Trayvon Martin Evidence the Media Won’t Repeat

People who read such newspapers or listen to such media presentations are not looking for the news, they are evading it. They just do not want to know. The world is uncomfortable enough, it seems, without having their space invaded by facts that might disturb the peace. They wish to be left alone.

And it’s not as if those who work for such media organisations are unaware of the same news the rest of us here see and read. They know it; they just won’t report it, and those who depend on them for the news are happy to leave things that way. So there is a kind of dependency relationship that builds. We will read your papers and watch your news programs but only if you provide the kind of perspective we are comfortable with.

It is almost incomprehensible. These are not generally stupid people. They are often people who pride themselves on their engagement and breadth of knowledge. But if it should happen that, for example, Barack Obama had once described himself as a Kenyan in a publication he had put his name to, then they would just rather not be told thank you very much.

These are not forecasts but actual descriptions of life in Greece as it is unfolding:

In Athens, the homeless are on the streets in growing numbers, soup kitchens feed twice as many people as a year ago, and the poor are diving into garbage bins in search of scrap they can sell.

Greece is close to breaking point as it struggles with austerity targets set by creditors, but this is just a foretaste of the nightmare of unrest, hunger and even anarchy that could engulf the debt-crippled nation if it is forced out of the euro.

And where might it go? There are no genuine precedents although the one parallel that comes to mind is Germany and Austria after the end of World War I before the signing of the Treaty of Versailles.

If the exact economic impact of such a move is hard to nail down – newly issued drachmas devalued by up to 70 percent, runaway inflation, a banking meltdown, a collapse in trade – the implications for ordinary Greeks crushed by the debt crisis are even harder to predict.

But who is to do what? If the Greeks won’t help themselves by agreeing to live within their means, and others are no longer prepared to subsidise their standard of living ad infinitum, then what’s next? And there are no doubt many who are caught in a trap of the voting patterns of others, who would have preferred governments of restraint rather than the handing out of commitments to spend that could never be afforded and so are innocent of any direct culpability in their economy’s disastrous turn.

But as with the Global Financial Crisis, we in the rest of the world had nothing to do with the American housing market but when it fell apart we have been forced to share the burden of adjustment. There is no good outcome, it seems, only degrees of bad. And the effect on the rest of us may be the GFC once again.

As the accompanying article on Drudge says, Obama was indeed born in Hawaii but asks why there has been so little vetting of the president. As they write:

It is evidence–not of the President’s foreign origin, but that Barack Obama’s public persona has perhaps been presented differently at different times.

The US is not really a country but a soap opera. How extraordinary this entire episode is.

Near the top of Alinski’s Rules for Radicals it is pointed out how valuable it is to make fun of the other side. Ridicule and satire are indeed potent but a transmission mechanism is also required. In the old days, when the ancestral media was all there was, it was hard to have such jokes make the rounds since there was nothing to carry these jokes from one person to another. And there was a time even when the new media had come onto the scene that there didn’t seem to be much point unless the ancestral media took up the story as well. But now we are in a new new world where we amongst ourselves can truly laugh at the other side and know it will be shared and spread far and wide. Eventually even the people who depend on The New York Times get to find out what’s being said, although admittedly it does take a longish time.

Obama, being the narcissistic fellow that he is, has been able to get away with it until now because we had not trusted in this new media. But with the internet and now twitter, we have come into our own. John Hinderaker argues that twitter in particular is made for the conservative side of politics because we are funnier, more inventive and better with words. Really, who does the other side have anywhere in the same league as Mark Steyn?

But Obama is a world of his own. GWB may have mangled a sentence of two but there is nothing like the current president as a subject for ridicule. The latest field of action surrounds his insinuating himself into the White House short biographies of former presidents. In its own way you would prefer to be able to show some respect for the man that is in some way comparable to the respect one would show to the office but it’s very hard. This from The Daily Caller is wonderful and captures just how fruitloopy it is. I will only give you Number 10 and you can read the rest yourself.

10.) In 1941, Standard & Poor came into being after H.V. and H.W. Poor Co. and the Standard Statistics Bureau merged. In 2011, Barack Obama became the very first president in American history to preside over the down-grade of America’s credit rating when S&P changed its rating of America’s creditworthiness from AAA to AA+.

Honestly, how can anyone take Obama seriously?

This is what happened in Sweden following the GFC:

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

What even Borg did not expect was that his tax cut for the low-paid would increase economic growth so much that it has almost entirely paid for itself. Borg had created something that Osborne’s critics say does not exist: a self-financing tax cut. ‘There was some criticism at the time that we were borrowing to finance tax cuts,’ he says. But Sweden could do it, because it was expecting to return to surplus soon; Britain has no such luxury, he says. His main advice to Osborne is: ‘Keep on dealing with the deficit, because deficits destroy everything else.’

This ought to be game, set and match. Perfect policy, entrepreneurially based and no fiscal stimulus. It should become the model for everyone else but for reasons seriously unknown will not prove to be.

With thanks to Abu Chowdah for drawing this to our attention in an earlier thread.

Andrew Reynolds raised an interesting question in the comments on another post. Suppose you believe, as we both do, that textbook macroeconomic theory as presently structured is fundamentally unsound. What then?

I would agree that the problem is what do we do from here. Clearly, most of the profession has ideas like these ones – and getting stuff published in the journals is difficult if you are outside the consensus. Any ideas on the best way to go on this?

This touches on a really important issue made all the more difficult by the insistance that all is right with the world and we are fortunate indeed to have such an excellent macro readily to hand when things go bad. This is David Romer in an article from a book just published titled, In the Wake of the Crisis: Leading Economists Reassess Economic Policy (MIT Press, 2012). There he wrote:

Given the wide range of evidence – not to mention the large body of precrisis work on the effects of fiscal policy that I have not touched on – I think we should view the question of whether fiscal stimulus is effective as settled. (page 60)

That’s why the issue Andrew raised is so formidable because it is the world’s worst problem getting things published that are outside the Keynesian consensus. And what Romer wrote is the consensus and it is hardening. Even amongst historians of economics, there are serious efforts made to restrict any use of HET to query modern economic theory and, of course, no normal economics journal will publish HET. Economists have effectively shut themselves off from the past because of its potential to disturb the present.

But the scandal surrounding the failure of the stimulus is growing. The mainstream does not want to talk about it but at the decision maker level there is a reluctance to throw good money after bad. Hollande may have been elected in France, and Obama is still there in the US, but the willingness to squander another trillion is just not there, but who can really know for sure.

The question for me is how do you get economists to abandon aggregate demand, to admit that the very basis for the macroeconomic framework has been worm eaten from the start, and the answer is that you can’t. The need to do this is not even on the radar in any school of thought that I know of because, given how everyone is taught, the idea is literally inconceivable. And once you start from a premise that recessions are caused by too little demand, the policy response almost states itself.

So what will happen – this is my optimistic scenario – is that over time governments will balance budgets, cut back on spending, reduce their level of taxes and encourage private sector growth without really having a theoretical framework that explains it. We will at the same time merrily continue to teach C+I+G as if that is a fair representation of how an economy works, and what’s worse, given what I have observed, we will tell our students that the model has again shown its worth during the GFC, just as Ken Henry seems to think. Whether it’s the textbook companies that will insist on it or just the deluded views of those who having predicted much worse are excited to find that things did not turn out as bad as they originally forecast is hard to say. The oppositional view will in the meantime remain at the margin of polite economic society.

The trouble with this suggestion is that it isn’t from 2008 but is from Paul Krugman in the New York Review of Books future dated as the 24th of May 2012.

The truth is that recovery would be almost ridiculously easy to achieve: all we need is to reverse the austerity policies of the past couple of years and temporarily boost spending. Never mind all the talk of how we have a long-run problem that can’t have a short-run solution—this may sound sophisticated, but it isn’t. With a boost in spending, we could be back to more or less full employment faster than anyone imagines.

But don’t we have to worry about long-run budget deficits? Keynes wrote that ‘the boom, not the slump, is the time for austerity.’ Now, as I argue in my forthcoming book—and show later in the data discussed in this article—is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.

Meanwhile, the strong measures that would all go a long way toward lifting us out of this depression should include, among other policies, increased federal aid to state and local governments, which would restore the jobs of many public employees; a more aggressive approach by the Federal Reserve to quantitative easing (that is, purchasing bonds in an attempt to reduce long-term interest rates); and less timid efforts by the Obama administration to reduce homeowner debt.

OK, I haven’t changed my opinion over the past three years either, but I don’t have to start things that I write with the kinds of disclaimer Krugman does by immediately owning up to “the depression we’re in” since that’s more or less what I expected to happen. Because in depression they definitely are and this is so in spite of every Keynesian thing that has been done. Since there is no evidence that more of the same will work this is just a matter of faith on Krugman’s part. Very touching but I suppose it is better for him to think as he does than to actually have to take any responsibility that the policies he sought to have introduced have been a catastrophe in so many individual lives across the US and elsewhere.

[My thanks to WB for sending the Krugman article along.]

This is Ken Henry on the 7:30 Report that has already been discussed by Sinclair. But I wish to come back to what he said myself. This was the most important statement Ken made and in saying what he said he might as well have been speaking for virtually the entire world of economists:

If it’s fiscal stimulus the most important thing is to get the money out the door. . . . Whether the money is in some sense wasted . . . from a macroeconomic perspective it’s very much second order, maybe even third order.

From a Keynesian macroeconomic perspective, that is exactly right. There is nothing in that statement that is in the slightest contrary to macroeconomic policy anywhere around the world. It’s why the economies of the West are in such strife, because our economic establishment believes such stuff. And it’s everybody, just as Ken said in another part of the interview in which he was discussing an earlier discussion at the top levels of Treasury prior to the coming of the Global Financial Crisis:

We’d asked ourselves a question, senior group of people in the Treasury – what would we do if we were to be hit with another big negative shock and how would we respond, what would our advice to the Government be? And everybody in the senior levels of the Department was of a one mind on how the Department should provide advice.

The thing is, and this is more unbelievable than anything else, they along with a large proportion of economists around the world, are of the view that what they did has been vindicated by events.

Spend wildly and unproductively, accumulate debt that will take decades to repay, and distort the direction of the economy into dead end forms of output. I’m used to hearing such views defended and am almost past the shock of it. But you really have to wonder how we will ever get out from under both the consequences of the stimulus, and what’s worse, how we will save ourselves from the mis-education of our entire economic “elite” who before 1936, had they been trying to peddle such stuff, would have been rightly seen as a bunch of economic cranks.

There are times you have to think the world was designed with the specific purpose of creating ironies. This article from Quadrant going back to 1994 is by none other than Ron Merkel, the prosecutor in the Andrew Bolt case, discussing his opposition to the introduction of racial villification laws:

The right to express centrist ideas and views will never be an issue. For the freedom to have meaning it must embrace the right to be wrong. Unpopular, divergent, derided or even dangerous ideas may best be dealt with by exposing the ideas and those that profess them for what they are. Silencing such ideas has not made them disappear. . . . .

The legislative path against racial vilification has not been shown to be successful elsewhere and there is no reason to believe it will be any more successful in Australia. On the other hand the educative path has been shown to be successful wherever it has been tried and achieved. The bill may have been entitled to a more sympathetic reception if that path had been vigorously pursued in Australia but had failed.

Read the lot.