Demand-Side Slump or Government caused Supply-Side Recession?

Posted by PITHOCRATES - June 4th, 2011

The Arrogance and Condescension of Liberal Elite Academics

The problem with liberal academics running the country is that they think like liberal academics.  They have no business experience.  But they know how to run businesses better than business owners who’ve been running businesses for years.  It’s the height of arrogance and condescension.  But these liberal elite academics don’t see people.  They see charts and grafts.  Which are religious icons to them.  Holy.  They accept them on faith.  They never question them.  And always make excuses for them when the policies they beget fail.  While pointing at successful policies with successful track records and calling them failures.  Because these policies are heretical.  And conservative.

Here is a liberal academic talking down to the American people with all-knowing condescension.  And if you want to know how the current administration thinks, all you have to do is read this arrogance and condescension (see Fatal Fatalism by Paul Krugman posted 6/4/2011 on The New York Times).

We are not, after all, suffering from supply-side problems…This is a demand-side slump; all we need to do is create more demand.

So why is this slump, like most slumps following financial crises, so protracted? Because the usual tools for pumping up demand have reached their limits. Normally we respond to demand-side slumps by cutting short-term nominal interest rates, which the Fed can move through open-market operations. But we now have severely depressed private demand thanks to the housing bust and the overhang of consumer debt, so even a zero rate isn’t low enough…

The answer seems obvious. We should be using fiscal stimulus; we should be using unconventional monetary policy, including raising the inflation target; we should be pursuing aggressive measures to reduce mortgage debt. Not doing these things means accepting huge waste and hardship.

But, say the serious people, there are risks to doing any of these things. Well, life is full of risks. But it’s simply crazy to put a higher weight on the possibility that the invisible bond vigilantes might manifest themselves, or the inflation monster emerge from its secret cave, over the continuing reality of enormous human and economic damage from doing nothing.

The housing bubble was created by too much unconventional monetary policy.  Money was dirt cheap to borrow.  And people borrowed.  To buy houses they couldn’t afford.  With subprime mortgages.  That they defaulted on when interest rates went up.  Causing the subprime mortgage crisis.  Which happens when you stimulate demand beyond normal market demand.  Why?  Because you don’t create healthy economic growth with easy money.  You create bubbles.

The Fed has done too much.  All their easy monetary policy to stimulate the economy has only devalued the dollar.  Making an important and scarce commodity more costly.  Because the world prices this most important of all commodities in U.S. dollars.  Oil.  Which makes diesel and gasoline.  The energy we use to bring food to market.  Which is why prices are up.  Across the board.  Especially food and energy.  That hit consumers the hardest.  Because of inflation.  Caused by monetary policy.  Which has failed to produce jobs.  Lower the misery index.  Or end the recession.

Their answer?  More of the same.  It’s always more of the same.  Jimmy Carter‘s ‘more of the same’ did not end the malaise of his stagflationRonald Reagan‘s economic policies did.  His conservative, supply-side economic policies.  That created real economic growth.  And doubled tax receipts to boot.  But his policies were heretical.  They went against everything liberals hold sacred.  Their Keynesian charts and graphs.  That look at business activity as an aggregate thing.  And not as people.  So liberals attack the success of Reaganomics.  Despite its soaring success.

You see, Reaganomics created jobs.  It made a favorable business climate.  So business people could do what they know how to do.  Create business. Expand business.  Make more things.  And create jobs.  Which drives all consumer spending.  Which makes up over 70% of the economy.  Because a consumer needs a job to spend.  And this kind of spending will sustain itself.  Unlike Keynesian tweaking.  Which is by definition only temporary.  To fill the gap until the private market restores itself.  Which makes Keynesian economics itself a paradox.  Using policies that hinder the private market to stimulate the private market.

The Inflation Monster is out and Squeezing Consumers

And while some will mock conservatives about letting loose the inflation monster from its secret cave, the inflation monster is already out.  And wreaking consumer havoc (see Tightening our belts: Americans lower income expectations by John Melloy, CNBC, posted 6/4/2011 on USA Today).

With consumers squeezed on both sides by stagnant wages and rising prices, the number who believe they will bring home more money one year from now is at its lowest in 25 years, according to analysis of survey data by Goldman Sachs.

The inflation monster has devalued the dollar.  And when you devalue the dollar you need more of them to buy the same amount of things you did before.  Because, thanks to inflation, those things have higher prices.  Consumers have to pay these higher prices.  Leaving them less money to spend.  And their employers have to pay them.  Leaving them less money to spend on wages.  So few people think they will bring more money home next year.  Because things are so bad this year.

A typical recovery pattern goes like this: stock market bottoms, economic growth bottoms and then hiring and wage increases return. What’s unique and scary about this recovery is that the last piece of the recovery is not there.

For a simple reason.  Intervention.  It’s all that Keynesian tweaking.  Like that trillion dollar stimulus bill.  If it wasn’t for all that government spending the economy may have actually recovered by now.  Now we have recession and inflation.  Thanks, liberal elite academics.

In the 2001 recession, the country lost 2 percent of jobs from peak employment and then made that back in a 48- month cycle, according to data from money management firm Trutina Financial. In 1990, the jobs lost during the recession were recovered in 30 months.

Right now, about 38 months from peak employment during the housing boom, there are still six percent fewer jobs out there. Making up that amount of jobs in 10 months or less would be unprecedented, if not impossible.

“The crawl out of this economic ditch is going to be long and slow,” said Patty Edwards, chief investment officer at Trutina. “Even if they’re employed, many consumers aren’t earnings what they were two years ago, either because they’re in lower-paying jobs or not getting as many hours.”

Jobs are everything.  And to create jobs you have to understand people.  Not look at sacred charts and graphs.  You have to understand what motivates the individual.  Not hypothesize about what will move aggregate curves on a graph.  Of course, liberal elite academics chose not to do this.  Because they are gods.  Infallible.  Who live in a world where paradoxes exist.  And can deny reality at will.

Small Business sees the Government as Adversarial

If jobs are everything, then why won’t there just be more jobs?  You’d think the gods could make them.  And no doubt are wrathful and miffed that their policies haven’t made them.  All because of those dirty, greedy, little business owners.  Heretics.  Sitting on cash instead of using it to hire people. 

Of course, the greatest job creators out there are small business owners.  Who don’t have big legal staffs or legions of tax accountants.  And these Keynesian polices are just overwhelming them.  As related in a conversation on a plane with a Yale law professor.  Who asked point blank why this small business owner didn’t hire more people (see Carter: Economic Stagnation Explained, at 30,000 Feet by Stephen L. Carter posted 5/26/2011 on Bloomberg).

“Because I don’t know how much it will cost,” he explains. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”

He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.

It’s interesting listening to a person.  Because you learn something different than you do from moving a curve on a graph.

“I don’t understand why Washington does this to us,” he resumes. By “us,” he means people who run businesses of less- than-Fortune-500 size. He tells me that it doesn’t much matter which party is in office. Every change of power means a whole new set of rules to which he and those like him must respond. ‘‘I don’t understand,” he continues, “why Washington won’t just get out of our way and let us hire.”

Get out of our way?  And let us hire?  You mean they would be hiring more people if it wasn’t for all the policies encouraging them to hire more people?  Interesting.  So what should government do?  How should they be in this business-government relationship?

“Invisible,” he says. “I know there are things the government has to do. But they need to find a way to do them without people like me having to bump into a new regulation every time we turn a corner.” He reflects for a moment, then finds the analogy he seeks. “Government should act like my assistant, not my boss.”

In other words, government shouldn’t tell business owners how to better run their businesses.  Because few in government have ever run a business.  They need to stop acting as the authority on something when those they try to help know more than they do.  This conversation gave this Yale law professor some food for thought.

On the way to my connection, I ponder. As an academic with an interest in policy, I tend to see businesses as abstractions, fitting into a theory or a data set. Most policy makers do the same. We rarely encounter the simple human face of the less- than-giant businesses we constantly extol. And when they refuse to hire, we would often rather go on television and call them greedy than sit and talk to them about their challenges.

Recessions have complex causes, but, as the man on the aisle reminded me, we do nothing to make things better when the companies on which we rely see Washington as adversary rather than partner.

And there it is.  Small business sees the government as adversarial.  And there is only one reason why they do.  Because it’s true.

Fiscal Stimulus is the Problem

This is not a demand-side slump.  It’s a supply-side problem.  Caused by the adversarial relationship between business and government.  Otherwise a trillion dollar in stimulus spending would have done something.  Other than give us inflation. 

Fiscal stimulus isn’t the solution.  It’s the problem.  And we need to stop trying to fix this problem with what gave us the problem.  Because they aren’t gods.  And we are individuals.  Not an aggregate to hypothesize about for fun and games.    

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FUNDAMENTAL TRUTH #46: “Liberals say ‘do as I say not as I do’ because they can’t point to anything worthwhile they’ve done.” -Old Pithy

Posted by PITHOCRATES - December 28th, 2010

The Professors Teaching our Kids are Long-Haired, Maggot-Infested, Flower-Child Hippies who Hate Capitalism

Liberals are know-it-all smarty-pants that want to fix everything.  Even the things that aren’t broken.  Because they are so full of themselves that they just know how to do everything better than anyone else.  Even though they have jack squat experience in the things they’re fixing.  And this is why liberals are destroying this country.

Liberals hate capitalism.  Because no one is in charge.  No one to make things work better.  Or more efficiently.  So they butt in.  Even though few of them have ever run a business.  Or had a real job.  They know absolutely nothing about business or commerce.  But they went to college.  Where they learned nothing useful.  Got a degree in one of the social sciences.  And then set out to make the world a ‘better place’.  All based on what some old, long-haired, maggot-infested, flower-child hippy from the 1960s told them in those useless social science classes.  And those hippies hate capitalism.  When they were young, all they wanted was for Dad to pay their tuition so they could stay stoned and screw their way through college.  They loved it so much they never left college.  They became ‘professors’.  In some useless social science program.

And they’re teaching our kids today.  Keeping the spirit of the 1960s alive.  Kids graduate without a clue of what capitalism is or what it has done for Western Civilization.  But their professors told them capitalism is bad.  That it isn’t fair.  That they should hate it.  And the only way to make capitalism fair and efficient is to get as much government as possible into it.  These students then do as their told.  And become good liberals.

Liberals are like Addicts in Need of a Fix

So these kids graduate from college programmed to disdain capitalism.  And they do.  They see market forces working freely without government intervention and they get that craving.  Like an addict in need of a fix.  Or a smoker stuck in a smoke-free building craving a cigarette.  And there’s only one way they can calm themselves.  By intervening.

Once upon a time, a long way from here, I worked in a small business.  There was the boss.  He sold and ran operations.  There was his wife who helped out part time when the kids were in school.  And there was me who did everything else in the office.  Sales were increasing.  The business was growing.  We were getting busy.  And I was working late.  Work piled up on my desk.  And it bothered the boss.  He thought it was me.  I was just not working fast enough.  So he went to some business seminar at a local bookstore and bumped into a consultant.  And he hired him.

The consultant was married to a CFO at some big company.  He stayed at home to raise their son.  And consulted.  He used to run the family business (he took over after his dad died).  But after he bankrupted that, he went back to school to get his MBA.  Got a perfect grade point average.  Smart guy.  But he was only good at going to school.  Well, that, and bankrupting businesses. 

Those who Can, Do.  Those who Can’t, Consult.

He started by timing me doing some tasks.  He actually sat beside me with a stopwatch.  Confirmed that I was working too slow.  Came up with some new procedures.  They might have worked in the corporate world they talk about in those MBA courses.  But small business is a different beast.  There’s a lot of ‘seat of your pants’ stuff.  Thinking on the fly.  Sort of like being a Marine.  You have to adapt, innovate and overcome.  Throughout the day.  You just can’t sit on your ass and come up with one-size-fits-all procedures.

But that’s what he did.  And the boss implemented them.  And I worked later into the night.  Some of the tasks worked well with the new procedures.  A lot didn’t.  And to make those tasks fit the new procedures took an inordinate amount of time.  I lost a lot of time elsewhere, too.  He created an Excel spreadsheet for the boss to use for sales forecasting.  The hours he had in developing this spreadsheet totaled $5,000.  And it didn’t work.  I actually debugged it (when you crunch numbers in a small business, a good spreadsheet program becomes your best friend).  Then, when it was working, the boss didn’t use it.  It was too complicated.  The boss was a successful entrepreneur, but he barely graduated high school.  And he never used that spreadsheet.

This consultant’s father was a successful entrepreneur.  He built a successful business.  He was good.  His son was not.  He enjoyed growing up with money.  He never learned a good work ethic.  He never learned the business.  And he destroyed everything his father built.  Sadly, not that uncommon when children take over the family business.  So what does a failed business owner do?  Why, consult, of course.

Good Intentions and Unintended Consequences

This guy was a liberal.  When he found out I was a conservative he had to discuss politics.  To flaunt his brilliance (that perfect GPA).  And condescend to me.  Because I was a conservative.  And he was an elitist.  Who married a rich woman (before he bankrupted the family business).  And lived in one of the most exclusive and affluent neighborhoods.  He never had a real job.  And the only business he tried failed.  He never had to work in his life (first a rich dad then a rich wife).  He had no business experience (at least, none of the good kind).  This guy had no business telling people how to run their businesses.  But he did.

What’s the difference between him and the liberals in Congress?  Not a whole hell of a lot.  They’re both liberal know-it-all smarty-pants.  With no experience in what they’re consulting/legislating.  And they both leave a swath of destruction in their wake.  They both put on their pants the same way.  The only real difference is that when the consultant puts on his pants he bankrupts companies.  When politicians put theirs on they bankrupt the nation.

Business people know how to run businesses.  Politicians don’t.  At least most on the left don’t.  But that doesn’t stop them.  They just have to step in and try to fix things.  To flex those egos.  They can’t help it.  It’s who they are.  They’re just so full of themselves.  Liberals.  They always start with the best of intentions.  But end up crapping unintended consequences all over the place.      

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