1. The “Great Recession” in the United States Was Worse Than You Thought
According to original estimates, U.S. gross domestic product (GDP) fell 3.8% for Q4 of 2008 — the quarter following the collapse of Lehman Brothers.
Since then — in one of the most underreported stories ever — that number has been revised up to an astonishing 8.9%.
That made it worse than any quarterly contraction in any recession since The Great Depression.
Now, 8.9% is a huge number. And it’s a number that Keynesian economists can point to as evidence of the success of the government stimulus packages passed at the end of the Bush administration and the start of Obama’s reign. After all, the economic hole was even deeper than we originally thought.
But even this sharp decline failed to impress Estonia’s finance minister, who I saw at the London School of Economics last week. I attended his presentation, “Why Paul Krugman Was Wrong.” (You can see James Oates’ article on that by clicking here). After all, Estonia endured an 18% contraction in its economy after the crisis. But by last year, it grew at a rate of 7.6% — five times the European Union (EU) average. In contrast, U.S. GDP growth keeps getting revised downward.
The Estonian finance minister called out Europe for living far beyond its means. Even after 19 summits, he sees no real austerity anywhere in Europe, noting that Hungarian policemen still retire at 42.
I didn’t have the nerve to tell him that cops in California retire even younger — before taking on a second career chasing coeds in golf carts on the Stanford University campus.
2. Obama vs. Romney: The Latest Version of Keynes vs. Hayek
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
– John Maynard Keynes
Whether or not you agree with Keynes’ economic views on the role of government in kick-starting an economy spiraling into recession, it’s hard to disagree with the wisdom of this quote.
In fact, if you look closely, you’ll see that the competing economic visions for the U.S. economy currently debated between presidential candidates — the ultimate “practical men” — is just the latest version of long-standing arguments between economists John Maynard Keynes (Obama) and Friedrich Hayek (Romney) that stretches back to the 1930s — the decade of the Great Depression.
So, both Obama and Romney are correct when they say that they offer two very different economic philosophies to voters.
Indeed, to paraphrase Keynes, the current U.S. presidential election is “ruled by little else.”
You can watch a serious treatment of Keynes’ and Hayek’s competing economic views in the recent BBC series “Masters of Money” by clicking here.
3. In Econ 101, Government Spending is Always Good
Notwithstanding high-level policy debates, I find it astonishing how little of Hayek’s ideas make it into mainstream economics textbooks.
The word “malinvestment” — the basic idea that not all investment is good or profitable — does not even appear in the index of the world’s bestselling introductory economics textbook. (Ditto for “Hayek” himself.)
That stands sharply in contrast to the Keynesian fiscal multiplier — the idea that any government investment will boost the economy by more than the amount it spends.
According to a study by Christina Romer and Jared Bernstein, President Obama’s $787 billion rescue package should have boosted GDP by about 1.5 times the size of the stimulus.
It now is widely acknowledged that the impact fell fall short of expectations.
Yet, in a Keynesian world of aggregates, it remains gospel that no government spending is ever bad.
Much like tribes in the Amazon who don’t have a word for “yellow” and therefore cannot actually “see” the color, mainstream economists simply don’t “see” or even acknowledge the possibility of wasted government spending.
So, according to economics textbooks, Johnstown’s John Murtha airport — built with $150 million — and allocated an additional $800,000 in TARP money to build a second runway despite only servicing 20 passengers a day — stands as an example of “successful” government spending.
After all, the construction of the airport provided a short-term boost to the economy, as well as a handful of jobs. The “cost” of the investment is irrelevant.
Too bad those not working in government cannot afford to think that way.
But it’s also because of thinking like this that I think mainstream economists turn a blind eye to astonishing levels of “malinvestment” in China.
Yet, as dozens of videos on empty cities in China can confirm, much of Chinese economic growth is simply the equivalent of the Johnstown airport multiplied a couple of hundred times.
Nicholas A. Vardy
Editor, The Global Guru
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