Aggregate nonsense

The economic policy debate is dominated by wishful thinking and fallacies of the most dangerous kind, propagated no less by the high and mighty in the policy bureaucracy and the alleged experts in the media.

Here is my point, and every clear-thinking person already knows it: That economic growth, and thus recovery from the crisis, will come about through the actions of governments is complete and utter nonsense. It is an illusion to assume that running budget deficits and printing lots of money and manipulating prices will make the economy better. Nevertheless, this fantasy is being reflexively regurgitated ad nauseam in countless reports and ‘analyses’ in the media so that nobody really bothers thinking about it anymore. A large part of the public seems to have been numbed into passively accepting it as the truth.

Since 2007, various governments have been engaged in Keynesian deficit spending and Monetarist money printing of unprecedented proportions. If the stupid ‘theories’ behind these policies had any merit, the world economy would be booming right now. It isn’t. Go figure!

Thank you, government, for all the growth!

Earlier this week the Wall Street Journal Europe had this to report about the Eurozone debt crisis:

“Some analysts also say the [fiscal consolidation] pact biases the euro zone toward recession. Not only does it limit governments’ ability to use budgetary policy to avert an economic downturn, but the long-term requirement to lower government debt would make it harder for nations with high debts, such as Italy, to grow their way out of their problems.”

[In fairness to the WSJE, the authors of the article may not share these views. But the ‘analysts’ who hold these views certainly exist, we know who they are, and they are actually quite numerous.]

So, here we have it. Public spending and deficits help the economy grow faster. By allowing our governments to constantly spend money they don’t have we all get more prosperous. — But how does that work? What is the evidence for this? Countries with massive government spending, big deficits and lots of debt are hardly booming, are they? In fact, these are the basket case economies. Is their problem maybe that they have not run large enough deficits in the past to stimulate their economies more?

The following statement is so absurd that it deserves repeating:

“The long-term requirement to lower government debt would make it harder for nations with high debts, such as Italy, to grow their way out of their problems.”

Italy has a debt problem. But if Italy was only allowed/encouraged/enabled to run even larger deficits, the deficits would then create growth, and this growth would automatically raise tax receipts and this would pay for the extra debt-load taken on to create the growth. Wonderful. Government deficits are obviously self-financing. They create growth that then pays off the debt, and not only the new debt but also the old debt, because only then would you “grow out of your problem”. The only question is how these governments could have piled up all this debt in the first place if their deficit spending was self-funding?

The idiocy behind these ideas knows no bounds, and the newspapers are full of such hogwash. That is why it is so refreshing when you occasionally get a chance to speak to sensible people.

The other day, I was discussing the economic crisis during a cab ride with the taxi driver. “I don’t get this,” he volunteered on the topic of the government saving us, without much prompting on my part, “so the government hires someone at £70,000 a year and is collecting £30,000 in taxes from him. Who pays the difference? How does that help the economy?”

To give credit to my cabdriver it has to be said that he probably has not undergone the extensive economic education that our economic experts have benefitted from. He had not had his common sense sapped out him by learning about magical multipliers, doing economic equations, and running complex econometric regression analyses. He is a practicing capitalist who is independent, has kept an independent mind, and who knows a thing or two about balancing the books, serving the paying public and running a business.

“Of course,” our economic experts will say, “this is all so very different, once you transport it into the complexity of the modern economy.”

No, it isn’t.

Fiscal death trap

Let’s look at a large and complex economy. The US economy is by far the largest in the world. The US Treasury and the US Federal Reserve hardly ever come under criticism from the Keynesian commentariat. Why? Because the US is conducting one gigantic Keynesian ‘stimulus’ experiment that is positively Krugmanesque in its dimensions. For years on end, the US government has been spending money like a drunken sailor, and the Fed is widely known, correctly me thinks, as a passionate QEer. In short, there is a lot of pro-growth policy going on in Washington.

Here is a very rough back-of-the envelope calculation: Economic growth in the US was 1.6% for the year 2011, when measured quarter over quarter (i.e. Q4/2011 versus Q4/2010). In a roughly $15 trillion p.a. economy that means an extra $240 billion in goods and services were produced by US companies and US individuals in 2011 compared to 2010. That is the extra growth, the extra economic activity.

Over the same time, the US government ran a budget deficit of $1,500 billion, and the Fed printed money to the tune of $600 billion, a growth-rate in the monetary base of almost 30 percent.

The US government is running 10% of GDP deficits to ‘stimulate’ 1.6% of growth. This is not only absurd it is certainly not self-financing. Debt is accumulating much faster than the economy is growing.

Is this how the ‘analysts’ imagine a country “grows its way out of problems”? Is this what Italy, Spain and Greece should do? (As an aside, as a percent of GDP, the Greek deficit and the US deficit are almost identical.)

The reality is that the US government is piling ever more problems onto its economy with these policies. The U.S. government is a hindrance to wealth and prosperity.

And for those who still believe the old folklore that it was exactly this type of policy that got us out of the Great Depression, consider this quote from FDR’s Treasury of the Secretary, Henry Morgenthau, spoken in the early 1940s:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. . . . After eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt to boot!”

Without the recent binge-spending the official statistics may well have shown an economic contraction in 2011. So what? At least that would have provided a realistic picture of what is going on on the ground in the US economy rather than provide some pathetic charade that is supposed to fool the public into believing we are in a recovery.

If the state stepped out of the way and allowed the liquidation of the accumulated imbalances, and allowed the private sector to get on with rebuilding the economy, we would already be in better shape. Present policies pile more debt on an already debt-laden economy; they obstruct the cleansing of the economy of misallocated capital and fictitious ‘wealth’, and introduce new misallocations of resources.

Aggregate demand, baby, aggregate demand!

All this nonsense is conducted in the name of “aggregate demand”. This concept itself is a coarse trivialization of economic reality. The economy is not about aggregate demand but always about specific demand, and the specific activities that are needed to satisfy that demand.

The economy is a tool. It is a tool for all of us who participate in it to improve our provision with material things by mixing our labour with that of countless other people in an extensive division-of-labour economy and with the accumulated capital stock in that economy. We get wealthier by combining our efforts with others in precisely the way that produces exactly the goods we want at the prices we are willing to pay for them, and we earn the income to afford these goods by participating in their production. If that sounds complex, it does because it is.

For this process to work, it requires an undisturbed market and free price formation (and that includes interest rates!), and it needs entrepreneurs and capitalists who constantly look out for new opportunities to combine capital and labour in new ways. Everything about this is specific.

But to those who keep babbling on about “aggregate demand” such complexities count for nothing. The economy can, in their view, be conveniently squeezed into a number of statistical aggregates, which can then be manipulated by government intervention. In a way, they consider the economy to be like a receptacle that can contain and should contain a certain amount of ‘economic activity’ at each moment in time, and if some ‘activity’ drops out of that bucket (because the private sector, at least momentarily, discontinues this activity) then the difference has to be made up by government activity of some sort.

In this concept, one activity is as good as any other. The drop in activity in the housing market (because a bubble, which had been inflated by state fiat money, finally burst) can be offset with the activity of the government building another road or spending more money on a war. It all neatly goes into GDP statistics – whether it is what people really want or not. It is the aggregate that matters.

Bad advice

In the meantime, over at the IMF, the Keynesian policy road show continues. The joy of constant debt accumulation and monetary debasement must be spread to every corner of the global economy. Asian growth, so says the IMF, has been resilient but with the international bureaucracy and the central banks already working hard at intensifying and prolonging the crisis, it is only a question of time until Asia will wobble, too. What, then? – More pro-growth policy of course:

“In the event of a further slowdown in the global economy, our sense is that most economies in Asia have room for a strong policy response,” said Anoop Singh, director of the IMF’s Asia and Pacific Department.

China and many export-dependent economies in the region could loosen fiscal policy, while Japan’s central bank could boost its asset purchases, he said, adding that efforts to trim external surpluses would reduce exposure to outside risks and support global growth.”

Thanks, Anoop, great advice. More debt and more paper money – prosperity through government policy knows no limits!

The IMF should, of course, be dissolved immediately. As a friend of mine, who worked for that institution for a number of years, observed: “The IMF only serves one group of people: those who work for it.”

And if you want to discuss the economy, you better do it with a London cabdriver than with anyone from the IMF.

In the meantime, the debasement of paper money continues.


  • George Doughty says:

    “Create a problem you can solve” was the first thing I learned as a salesman (stockbroker). That’s all politicians and their sycophants do; and hope like hell the majority never figures it out.

  • Paul Marks says:

    Sir – sadly, with the establishment, you are wasting your time.

    No matter how much government spends (how “expansionary” “fiscal policy” is) and no matter how much money Central Banks create (how “expansionary” “monetary policy” is) they will simply come back with sillyness about how “broad money” (i.e. the credit bubble of their own banks and so on) is not growing or is shrinking (as if this vast credit bubble was sustainable – and as if expanding “broad money” was a good thing). Of course Central Bankers will respond to any real decline in the credit bubble by producing EVEN MORE money (expanding the monetary base even further) thus twisting the capital structure even more than it is twisted already (and it is like a corkscrew now).

    Do they actually believe their own doctrines? Or is it just the voice of greed (“the only thing that matters is maintaining the sacred credit-money bubble”)?

    Who knows?

    At this stage it does not really matter whether they believe their own doctrines or not – for it is already too late to prevent a true economic meltdown.

Comments are closed.