Daniel Gross: Channeling His Inner Krugman

The New York Times has been a fount of Keynesian revivalism, with not only Paul Krugman's frequent columns and blogs preaching the Gospel of Spending but also other writers as well. Today, I look at a column by Yahoo's economics editor Daniel Gross, in which he claims that the nation's economic recovery depends upon individuals using debt to purchase consumer goods.

Gross claims that the real secret of the past success of the U.S. economy has been the fact that U.S. consumers spend a lot of money. I'm serious. He writes:

...as the economy slowly recovers, there are signs that Americans are rediscovering their free-spending ways. Total consumer credit, which includes non-revolving debt like car loans, has stabilized, and it rose in both June and July. It’s back to where it was in the second quarter of 2009. Collectively, we don’t seem to have run our credit cards through shredders. Mailboxes are again stuffed with credit card solicitations. Newspapers are filled with come-ons from car dealers offering zero-percent financing. The Federal Housing Authority offers mortgages on houses for as little as 3 percent down. You’d be forgiven for thinking that we’ve flown back in time to September 2006.

And, believe it or not, that’s a good thing. The economic expansion that has been going along in fits and starts since June 2009 was initially powered by government stimulus and business investment. But for this recovery to mature, broaden and persist, the greatest economic force known to mankind — the American consumer — has to get back in the game. (Emphasis mine)

In an economy in which consumers account for 70 percent of activity, credit is both a vital lubricant and the indispensable fuel.

Somehow, it does not surprise me that our "elite" thinkers believe this nonsense. (Almost everyone I have known who has been associated with the NYT has considered himself or herself to be intellectually and morally superior to the rest of us mundanes. Over time, these people really do become caricatures of themselves.)

However, if what he is saying is true, then we really should be passing on this Great Secret. Tell the people of Haiti that if they want to have a thriving economy and recover from the recent earthquake, they need start borrowing lots and lots of money so they can buy consumer goods, houses, and the like and spend themselves into prosperity. As for the goods on the shelves, if you spend, they will magically appear.

I would like to contrast Gross's comments with some real economic analysis from Robert Higgs, who recently wrote:

As every student of the business cycle learns early on, the most variable part of aggregate expenditure is private investment. When real gross private domestic investment peaked, in the first quarter of 2006, it was $2,265 billion, or 17.5 percent of GDP. When it hit bottom in the second quarter of 2009, it had fallen by 36 percent to $1,453 billion, or 11.3 percent of GDP. (Deducting investment expenditures aimed at compensating for depreciation of the private capital stock [Table 1.7.6], we find that real net private investment – the part that contributes to economic growth—in the most recent quarter was only one-third as great as it was at its peak in early 2006.) The ups and downs of the business cycle are obviously driven not by consumption spending, but by investment spending.

The difference becomes even more obvious when we compare quotes from Gross and Prof. Higgs. First, I quote Gross:

John Maynard Keynes wrote of the paradox of thrift — if everyone saves, everyone becomes poorer, because demand for goods and services will fall. Here’s another paradox: Running up consumer debt may be a moral failure and a recipe for long-term damnation, but it also contains the roots of our short-term salvation.

Now I quote Prof. Higgs:

Such arguments, however, fail to grasp the true nature of the boom-bust cycle, especially the central role of investment spending in driving it—and, more important, in driving the long-run growth of real output that translates into a rising standard of living for the general public. Politicians, if they truly wish to promote genuine, sustainable recovery and long-run economic growth, need to focus on actions that will contribute to a revival of private investment, not on pumping up consumption. In the most recent quarter, real gross private domestic investment was running at an annual rate more than 20 percent below its previous peak and, as noted, real net private investment was fully two-thirds below its previous peak.

To bring about this essential revival of investment, the government needs to put an end to actions that threaten investors’ returns and create uncertainty that paralyzes their undertaking of new long-term projects. Gigantic measures such as the recently enacted health-care legislation and the financial-reform law, which entail hundreds of new regulations whose specific content, enforcement, and costs are impossible to forecast with confidence, contribute to “regime uncertainty” and thereby encourage investors to hold large cash balances or to park their funds in short-term, low-yield, less risky securities. Such investments cannot support genuine recovery and sustained long-run growth.

In sum, our crying need at present is for a robust revival of private long-term investment. Consumption-oriented government “stimulus” programs, at best, only ensure a protracted period of economic stagnation.

Gross, like Krugman, seems to believe that all that is necessary for our economy to recover and grow is for the government to shower dollars on everyone, who will then take the money and spend it, and borrow to add to whatever they don't have. And if people and businesses are not willing to spend, then it is up to the government to confiscate that money via taxation and inflation and other methods of coercion, if necessary.

Prof. Higgs, on the other hand, says that economies grow when businesses are able to invest for the long term and find ways to produce more using fewer resources over time. Thus, the value of "investment spending" is NOT the spending per se, but rather the fact that the lines of production in which they invest are able to produce goods that satisfy the needs and desires of consumers.

I would add that the Krugman-Gross-NYT approach assumes that spending is mechanistic and exists only to clear the shelves so producers can put more goods on the shelves again. In that view, production and consumption are not intricately related, and entrepreneurship is useful ONLY in the fact that they are able to provide jobs for people so they can spend, clear the shelves, and put more stuff back on them.

This is not an economy; it is a circular pattern, and in that view, production is useful only in the fact that it keeps people busy. It would be just as useful for people to be paid to dig holes and then fill them afterward, and continue the process indefinitely. And this is the best that our "elites" can do?

Lew Rockwell on Keynesian "Inception"

One thing I like about Lew Rockwell is that he has an uncanny way of explaining things in ways that anyone (except, perhaps, a Ph.D. economist) can understand. There is no wonkishness, no equivocating, and certainly no appeal to the God of the State.

His latest article, "The State's 'Inception' Fails," is an excellent case in point, and I urge readers to find out for yourselves why I believe this commentary is on the mark. Lew writes:

Two years ago, the economy was seriously dragged down amidst an amazing banking crisis that spread throughout the world. The illusion created by loose credit – that housing could go up in price forever and we could enjoy permanent prosperity due to monetary expansion – was shattered by events. Reality had dawned. We found ourselves in the midst of an economic depression.

At that point in policy, we were at a fork in the road. The wise direction was to let the depression happen. Let the bad investments wash out of the system. Let housing prices fall. Let banks go broke. Let wages fall and permit the market to reallocate all resources from bubble projects to projects that make economic sense. That was the direction chosen by the Reagan administration in 1981, and by the Harding administration in 1921. The result in both cases was a short downturn followed by recovery.

The Bush administration, in a policy later followed by the Obama administration, instead attempted a tactic of dream incubation as portrayed in the recent film Inception. The idea was to inject artificial stimulus into the macroeconomic environment. There were random spending programs, massive buyouts of bad debt using phony money, gargantuan tax tricks, incentive programs for throwing good money after bad, and hiring strategies to weave illusions about how all is well.

His reference to "Inception" is quite accurate, and his explanation clearly explains his analogy:

In the movie, the goal of the dream incubation was to implant an idea into an unsuspecting subject’s head that would cause him to act differently than he otherwise would have. In the real life version of inception, the state tried to implant in all our heads the idea that there was no depression, no economic collapse, no housing crisis, no push back on real estate prices, and really no serious problem at all that the state cannot fix provided we are obedient subjects and do what we are told.

In the movie version, the attempted inception is on a time clock. The dream weavers can only keep the subject in a state of slumber so long. In the real life version, things are much messier. The headlines have spoken about the impending recovery every day for all this time, and yet the evidence has never really been there. All the stimulus really did was forestall events a bit longer, but it hasn’t prevented them.

Now, with the stock markets melting and the near-universal consensus that we are back in recession, everyone is awake. It is pretty clear that the inception did not take. The unemployment data look absolutely terrible. As the Wall Street Journal points out, only 59% of men age 20 and over have a full-time job (in the 1950s, that figure was 85%). Only 61% of all people over 20 have any kind of job now.

Unfortunately, the "educated" people like Paul Krugman and Ben Bernanke, while disagreeing on some of the details of what government policies should be, nonetheless share the same general view: Only government spending can bring back the economy through artificial "stimulus." Unfortunately, these people have misunderstood what an economy really is and how it works. Like other academic economists, they see an economy through mathematical equations in which there really is no purposeful human action.

Instead, the automons produce goods on one end and then "buy back" what they have produced, which makes no sense from the larger point of view. It creates a view of people who simply go through the same motions day after day, and if they do it enough times, the economy gains what Krugman likes to call "traction," which then permits this process to go on somewhat rhythmically. If the individual does not spend in the patterns that the academic economists declare are necessary for this "traction" to continue, then the consumer somehow is "falling down on the job."

With the "Ruling Class" economists and politicians, there always is someone else to blame. The "stimulus" was too small; consumers are greedily saving their money instead of dishing it out at the stores and in auto showrooms; businesses refuse to engage in long-term spending and investment; banks are sitting on reserves; or Republicans (though is a huge minority in Congress) are keeping President Obama from carrying out his proper duties just as Goldstein constantly thwarted the aims of Big Brother.

Unfortunately, this administration -- like the one that preceded it -- is refusing to face reality and continues to believe in its "inceptionist" tactics. However, an economy is not an imaginary construct; it is a real entity and its success depends upon the ability of entrepreneurs and producers to make those goods that people need, something that always will escape the understanding of the supposedly "best and brightest" among us.