Trying to get Economic Traction during Periods of Inflation is like trying to crawl up a Slippery, Muddy Slope
Good news. Consumer spending is up (see Consumer spending rebounds, calms recession fears by Lucia Mutikani posted 8/29/2011 on Reuters).
The Commerce Department said on Monday consumer spending increased 0.8 percent on strong demand for motor vehicles, after slipping 0.1 percent in June…
When adjusted for inflation, spending rose 0.5 percent last month, the largest gain in 1-1/2 years and the first increase since April.
Half of one percent. Wow. If it wasn’t for inflation that could have been 0.8%. Now is this good news? Or is it just the back-to-school summer bump? People buying those things they have to. So their kids can go back to school.
Despite the rise in spending last month, economists remain worried about the slow pace of income growth. Income gained 0.3 percent after advancing 0.2 percent in June.
Disposable income increased 0.3 percent, but when adjusted for inflation fell 0.1 percent — the first decline since September.
Thanks to inflation, a gain in disposable income became a loss. No wonder people aren’t spending. They have no money.
The report also showed inflation pressures remain elevated. The personal consumption expenditures price index, or PCE, rose 0.4 percent after slipping 0.1 percent in June.
Compared to July last year, the index was up 2.8 percent, the largest increase since October 2008, after advancing 2.6 percent in June.
Whoa. The PCE rose 2.6% in June? No wonder we have no money to spend. These higher prices are the same as taking a 2.6% pay cut. That’s why consumer spending is flat. Inflation is shrinking the money in our wallets faster than we can spend it.
Trying to get economic traction during periods of inflation is like trying to crawl up a slippery, muddy slope. You struggle to ascend 3 feet then pause to rest. And slide 2 feet back down. Or, based on the disposable income numbers above, you slide 4 feet back down. Ending up worse off than when you started.
The hell with Inflation, let’s just keep Heating up that Economy with Artificial Demand
Yes, inflation is bad. It destroys real economic growth. Real wealth. And the standard of living. But Keynesians love it. And they want more of it (see Changing target posted 8/27/2011 on The Economist).
The gap between the performance of inflation and that of nominal GDP is so big that some economists, such as Scott Sumner of Bentley University, are dusting off an old idea. They are calling for central bankers to switch targets. Rather than directing monetary policy to hit inflation targets (as they have done for the past 20 years) central bankers should take aim at nominal GDP (or NGDP)…
Advocates of nominal GDP targeting claim that it would achieve greater macroeconomic stability.
In other words, they say the hell with inflation. Let’s just keep heating up that economy with artificial demand. Until real demand catches up.
So were they wrong all this time? And if so, why would we think they got it right now? I mean, they have a history of being wrong. And a change in policy is an admission that they were wrong.
They tried something like this before. During the Seventies. Where we had both high unemployment. And high inflation. You know what finally fixed that? Ronald Reagan. Who wasn’t a Keynesian.
The Central Premise of Keynesian Economics is any Spending is Good Spending
So why are they still taken seriously? If Keynesians have a record of failure, why is Keynesian economics still the mainstream thought? Because it empowers government. And government spending.
It’s a religion to them. And they never lose their faith. Despite a long record of failure. Besides what other economics school puts a bunch of Poindexters in charge of economic policy? Telling American people what’s best for them? Despite never having done anything themselves in the private sector? This is about as close to an aristocracy that you can get in America.
To get an idea of how out of touch with reality these economists are, consider their central premise. Any spending is good spending. No matter where that money comes from. Because they don’t look that far back. They don’t see alternate uses of money. Or the loss and sacrifice that often accompany ‘stimulus’ spending. They just see the ‘goodness’ of spending. And nothing better illustrates this than their love of disasters (see Disaster isn’t a stimulus package by Jeff Jacoby posted 8/28/2011 on boston.com).
“One of the most reliable results of any natural disaster,’’ remarks economist Russell Roberts, “is the spreading of bad economics.’’
And how they love to spread bad economics. Where any spending is good spending. Even if it takes loss of life and destroyed cities to initiate that spending. Consider the following:
Three days after disaster struck, the Huffington Post published Nathan Gardels’s essay celebrating “The Silver Lining of Japan’s Quake.’’ Urging his readers to “look past the devastation,’’ he rejoiced that “Mother Nature has accomplished what fiscal policy and the central bank could not.’’ Now the Japanese would have lots of bridges to build, “entire cities and regions’’ to reconstruct, and information networks to revamp.
“The result of all the new wealth creation,’’ Gardels concluded, “will be money in the pockets of Japanese.’’
“It seems almost in bad taste to talk about dollars and cents after an act of mass murder,’’ wrote Paul Krugman in The New York Times less than 72 hours after the atrocities of 9/11, but the terrorist attacks could “do some economic good.’’ After all, Manhattan would “need some new office buildings’’ and “rebuilding will generate at least some increase in business spending.”
Barely had the storm subsided when J.P. Morgan economist Anthony Chan was assuring CNN/Money that hurricanes tend to stimulate growth. Granted, New Orleans had been shattered, said Chan, but “over the next 12 months, there will be lots of job creation, which is good for the economy.’’
“This will probably be a stimulus,’’ University of San Diego economist Alan Gin told the Los Angeles Times, since “there will be a huge amount of rebuilding … financed by insurance payments.’’
Sure, some people will benefit from the economic activity to rebuild from a disaster. But a lot of people will have already lost by then. And will lose even more via higher insurance premiums. Higher taxes. Or higher inflation. Because there’s no such thing as a free lunch. Someone ultimately has to pay.
Or, said in another way…
More than 160 years ago, the French political economist Frederic Bastiat skewered such attitudes in a now-famous parable: A boy breaks a shopkeeper’s window, and everyone who sees it deplores the pointless destruction. Then someone insists that the damage is actually for the good: The six francs it will cost the shopkeeper to replace his window will benefit the glazier, who will then have more money to spend on something else. Those six francs will circulate, and the economy will grow.
The fatal flaw in that thinking, Bastiat wrote, is that it concentrates only on “what is seen’’ – the glazier being paid to make a new window. What it ignores is “what is not seen’’ – that the shopkeeper, forced to spend six francs on that, has lost the opportunity to spend them on better shoes, a new book, or some other addition to his standard of living. The glazier may be better off, but the shopkeeper isn’t – and neither is society as a whole.
Would a Keynesian leave his or her car in a bad neighborhood with the doors unlocked and the key in the ignition? To encourage someone to steal that car? So they can stimulate the economy by buying a new car? That would result in new spending. And they believe all spending is good spending. But somehow I don’t think they would. Not with their car. Your car, perhaps. But not theirs.
The Obama Administration is a Keynesian Administration
Inflation destroys real economic growth. Real wealth. And the standard of living. Yet it’s the favorite policy tool of Keynesian economists. Well, that and devastating disasters. To other people, that is. Not to them.
These people don’t live in the real world. They live in the fairyland of academia. It’s a world of theory. Not reality. Where they can tell each other how brilliant they are. Despite all their failures.
And the scary thing is this. These are the people guiding U.S. policy. The Obama administration is a Keynesian administration. While the Great Recession lingers on, these people live comfortably. Thinking up the next thing they can do to help this economy. And us. Because they know what’s best for us. And they don’t even have to ask us. Not that they would want to. Or would.
And their record so far? Why, it’s so good that they want to change the way the Fed targets monetary policy. And by ‘good’ I mean bad. Very, very bad. For they say if it ain’t broke don’t fix it. And they’re trying to fix it. So it must be broke. Very, very broke.
Tags: artificial demand, consumer spending, CPE, demand, disposable income, economic growth, Economics, government spending, higher prices, inflation, Keynesian, Keynesian economics, Keynesian economists, Keynesians, monetary policy, real demand, spend, spending, standard of living, tax, wealth