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.
Of course, arch-Keynesian Paul Krugman thinks different, firing off this salvo:
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.
azizonomics 
Strong conclusion in the end, well my theory is simple as a citizen as someone with the capability to excersise ones democratic right. Vote the people out from office and remove your wealth currency from the banks. That is the only thing that can trigger a perverse turn-around.
The current system enslaves people by making them dependant. And the Rothschilds already conceptualised this back in the 1850’s
“Competition in the market place is a sin”David Rockefeller…..since monopolies became illegal ,”Duopolies” flourished …coke /pepsi , burger king/mcdonalds , verizon/a.t.t. ,et al. , etc. , ad infinitum (well finitum actually).Duopolies are pretty happy the way things are , oil for energy,junk for food ,high prices for communication ,owned governments for tax breaks and tax laws , citizenship in the u.s.a. so they can continue to own governments through bought out politicians ,which leads us to conflict of interests .This is the invisible hand in the market place , the fifth business if you will.America runs on debt,as does all capitalism .Bonds for sewer projects , bonds for Highways , paid for in the future by taxes.Then the private sector usurped public bonds for stadiums and burden the public with more debt ,rather than the private market. Which leads to the present situation of absolute corruption and collusion .So whether we accept Kensyian economics is secondary .We print money we pay interest to a private bank for our money ,The Federal Reserve ,and we repay that money on interest rate they declare .Now we are asked to collectively freak out because the debt is huge ,and to cut the standard of living of 80% of the American public.Clinton rode a bubble and turned the deficit into a surplus , but that was before the sky began to fall and 165 paid talking heads led the cheer leading to freak out .The solution is not too difficult for capitalism , it involves printing money and getting that money back back to pay the printers(federal reserve bank) and to turn the debt into an asset , and keep the interest payments paid ,so we can print more .Highways use tolls to do this ,Sewer system use household useage taxes and governments use sales taxes,state taxes,excise taxes and federal taxes.A highway raises tolls , a sewer system raises useage taxes if the need to cover the “vig” ,but the federal government doesn’t seem to be able to raise it’s taxes and stop printing money..You brought up great points ,one point you neglected was that unemployment benefits are paid for by the unemployed as they paid into that fund . peace
Hey, good to find someone who agrees with me.
Capitalism is working fine. Consumers don’t have the money to buy cheap trinkets, so these manufacturers of cheap trinkets go out of business.
The only things that will be purchased are necessities and infrastructure to get those necessities to market.
I used to be a Keynesian, but now I am a firm believer in Micreconimics. (Economics of the fim) When I see fruit rotting on trees becuase labour costs are too high, and welfare recipients too lazy to pick it, I know we have a problem. If that welfare labour were to apply some elbow grease and work, the supply of fruit would hit the markets and prices would come down. With the $5 dollars you save on a bag of oranges, that energy from the sun, that water in the soil, and that fat tissue burned by the welfare recipient would translate into $5 to the local businessman who has an innovative new product. When you don’t have $5 because food prices are too high, that innovative businessman receives a welfare cheque.
Great post Buddy. I was never fully committed to Keynesianism, though I have studied it and think it asks a lot of important questions. I don’t know what my economic position would be classified as. Austrians criticise me for believing too much in government, and Keynesians criticise me for believing in sound(er) money. I guess the historical economist whose views are most compatible with mine is Adam Smith. I wonder what he would have made of this mess we are in?
Paul Krugman, I am concerned your argument for declining rates did not mention the unique situation of the reserve status of the United States. The policies of the administration are so bad, it is going to ruin the world economy, and the money goes to the United States, because in total war, the USA has the muscle to get itself out of trouble. Look at Germany. It got itself out of a similar situation by deciding to gear up a military economy.
I have written this post to record in posterity my economic thoughts. Short of a massive back flip by the American people, to rebuild their infrastructure, reduce their wasteful military spend, create new cleaner technologies and cars that compete with German cars, reduce their crime, and attract the best and brightest, I don’t see a future for the USA. I recall a Russian strategist who predicted the breakup of the USA. It is becoming more plausible. Politics (The People) are polarised.
Forgive me if I am wrong I am not a US citizen, but can’t states leave the union? What if the Tea Party States, decide to create a new union, would capital move to these states? Who would fund the bonds of state governments not adopting prudent measures? Would criminals reside in these states? Or would they move to Democrat states? Would there be a migration from States, depending on political view? Would Latinos migrate to the States where they are persecuted by Right Wing Americans?
I am not a supporter of Neo Nazi’s, my Grandmother being a WW2 internee of the Nazis. The Nazi websites are becoming more common. This is the same groundswell of popular support the Nazis used to get into power.
Great contribution to the discussion Buddy, you talk very down to earth about ecnomomics becaus it is down to earth. however alot of people confuse economics with monetary and financial policy making. Like you put it i’m truely distressed when i go to a shopping mall and at the end of the week they decide to throw away 5 to 7% of their holdings. because the product expiry date is reached. even tho its usualy consumable for 3 more days or sometimes up to a week. WAKE THE FUCK UP PEOPLE !
Also they gather these products in a special container send it back to the distribution center where it gets destroyed. when i see that i have to facepalm and wonder what this world will become. Now some Keynesian would say it would exert downward price pressure if you distribute it amognst people especially the needy ! UNPLUG YOUR MATRIX UPLINK NAO.
But my grandma used some wise words Fiat = Toilet paper and used for lighting up fires (converting it to BTU) and having 3 decent meals a week was luxury (Meat, eggs and vegetables).
Oh yea and on a personal note, i always take the products with 1 or 2 days before “expiration” it’s aproximatly a 40% reduction of price. However some of YOU retards out there scavange worth of 1 extra day on a ~14 day expiration period of a product.
Real brain power on display. Thanks for that anwser!