Do you hate economics? Stephen Moore at the Wall Street Journal wrote a long a grisly post stripping things down:
Christina Romer, the University of California at Berkeley economics professor and President Obama’s first chief economist, once relayed the old joke that “there are two kinds of students: those who hate economics and those who really hate economics.” She doesn’t believe that, but it’s true. I’m surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense. Alas, the policies of this administration haven’t boosted the profession’s reputation.
Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance “creates jobs.” She received this slap down: “I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper.”
Mr. Carney explained that unemployment insurance “is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren’t earning a paycheck are going to spend the money that they get . . . and that creates growth and income for businesses that then lead them to making decisions about jobs—more hiring.”
That’s a perfect Keynesian answer, and also perfectly nonsensical. What the White House is telling us is that the more unemployed people we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this.
I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn’t work. I can say with 100% certainty as a parent that in the Moore household this will lead to less work…
How did modern economics fly off the rails? The answer is that the “invisible hand” of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new “macroeconomics,” a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.
A number of people have pointed me to this remarkable editorial by Stephen Moore in the WSJ. What’s remarkable isn’t the views; it’s the all-out embrace of anti-intellectualism. It actually denounces “fancy theories” and rejects them because they “defy common sense”.
Gosh, if that’s the way the right is going, the next thing you know they’ll reject the theory of evolution. Oh, wait.
There’s a lot to critique here, if you have the stomach — among other things the question of what constitutes common sense. Some people find it commonsensical that if the government puts people to work, that adds to employment; it takes fancy arguments from the likes of the WSJ to convince them otherwise.
But the main thing I’d like to point out is that the past three years have in fact been a stunning confirmation of one fancy theory — namely, the theory of the liquidity trap, which is part of the broader construct of Keynesian economics.
I mean, common sense — or at least common sense as the WSJ sees it — would tell you that massive government borrowing would send interest rates soaring. And that’s certainly what the WSJ editorial page told its readers would happen. Only us fancy-schmancy Keynesians said otherwise; and here’s what actually happened:
They’re both dead wrong. The problem isn’t Keynesianism, nor is it anti-intellectualism. The problem is that government has singly failed to get things to work. If government programs are geared toward delivering what people actually want and need — in the case of America today, that would be better road infrastructure, alternative energy, improved food infrastructure, more American manufacturing, less reliance on foreign oil, and sufficient capital to create a new generation of young entrepreneurs — then that spending would work reasonably well, and the unemployment and manufacturing indices might not look so dismal. Christina Romer, the U.C. Berkeley Professor, and adviser to President Obama, may complain that the stimulus wasn’t enough. But really, it was misdirected — to dead-end waste like the wives of Morgan Stanley executives, to bridges to nowhere and bureaucracy. The monetary stimulus — rather than giving the middle classes cash in their pocket and alleviating mortgage woes — is sitting there as bank reserves, or compounding food and fuel inflation in commodities speculation. Perhaps this is the inevitable consequence of a jumbo-sized corrupted and corrupting government, and an administration stuffed with Wall Street asset strippers and corporatists like Tim Geithner and Larry Summers. Of course, as Moore suggests, there is an element of theoretical failure, too:
As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: “Macroeconomics was nothing more than a dismissal of the rules of economics.” Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.
The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. “All economic problems are about removing impediments to supply, not demand,” Arthur Laffer reminds us.
But for whatever reason, it has failed. And it is because of this colossal failure of government to direct money appropriately that we must quit hoping for a government solution and instead turn to the people. On August 17th I wrote:
While tax reform cannot directly solve these problems, Warren Buffett and his “progressive oligarch“ friends can. How?
Job creation. Investment in infrastructure. Investment in young people. Look at the humungous of levels bank reserves.
There is cash just sitting idly that could instead be channeled into real investment in jobs and infrastructure — the kind that Paul Krugman calls for, just without the government involvement (or the Alien invasion).
People hate economics because governments, large corporations and other institutions are screwing up unendingly, addressing the wrong problems, addressing non-problems, and (particularly in the case of governments) giving handouts to their friends. And economics doesn’t offer any answers about how to get sensible or effective economic policies through legislatures, or preventing corruption and corporatist looting. To correct these problems, bad corporations and companies have to be allowed to fail, and bad government has to be booted out. It’s as simple as that.