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Posts Tagged ‘stimulus’

Back in 2010, then-House Speaker Nancy Pelosi actually claimed that paying people not to work would be good for the economy.

Wow, that’s almost as bizarre as Paul Krugman’s assertion that war is good for growth.

Professor Dorfman of the University of Georgia remembers Pelosi’s surreal moment and cites it in his column in Forbes, which debunks the Keynesian assertion that handouts create growth by giving recipients money to spend.

It is true, of course, that the people getting goodies from the government will spend that money, which also means more money for the merchants they patronize.

People who favor redistribution for other purposes often try to convince others to support them on the grounds that their favored policies will also create economic growth. …let’s review the story as told by those in favor of redistribution. When the government provides benefits to people without much income or spending power, those people will immediately go out and spend all the money they receive. This spending creates an economic multiplier effect as those who get the dollars re-spend some of them… There is nothing particularly wrong with the above story as far as it goes. Economic spending does create more spending as each person who gains income then spends some of that income somewhere else.

But there’s always been a giant hole in Keynesian logic, as Prof. Dorfman explains.

The redistribution advocates always forget to consider one part: where did the money handed out in government benefits come from? …There are three possible answers to that question: the money was raised in taxes, the money was borrowed from an American, or the money was borrowed from abroad. The fact that the money came from someplace is the key because for the government to have money to hand out it must first take it from somebody.

I would add a fourth option, which is that the government can just print the money. But we can overlook that option for the moment since only true basket cases like Venezuela go with that option. And even though we have plenty of policy problems in America, we’re fortunately a long way from having to finance the budget with a printing press.

So let’s look at Dorfman’s options. When governments tax and borrow from domestic sources, all that happens is that spending get redistributed.

If the government raised the money in taxes, then the people paying the taxes have less money to spend in the exact amount that is going to be handed out. …somebody’s spending power was reduced by the exact amount that somebody else receives. …If the money is borrowed from an American, the same thing happens. The person lending the money now either doesn’t spend the money or cannot save the money. When money is saved, banks lend it out. That borrower intends to spend the money (otherwise, why borrow?). When the money is lent to the government instead of being put in the bank, the loan and associated spending it would have created disappear.

And the same is true even when money is borrowed from foreign sources.

…the final hope for economic growth from government transfers would be if the government borrowed the money from abroad. This could work, as long as the money otherwise would not have appeared in the U.S. economy. For example, if China sells us products, they end up with dollars. The question is: if they don’t use those dollars to buy Treasury bonds, what will they do instead? The answer is that the dollars generally have to end up back in the U.S. Even if China turns those dollars into euros and buys German bonds instead, somebody else now owns those dollars and will spend them in the U.S. in some fashion (buying products, companies, or investments).

Prof. Dorfman explains that Keynesianism is merely a version of Bastiat’s broken-window fallacy.

…the claimed economic stimulus from giving money to the poor is offset by the lost spending we do not get from the original holder of the money. …this is a classic example of a famous economic principle: the broken window fallacy. In the fallacy, townspeople rejoice at the economic boost to be received when a shopkeeper must spend money to replace a broken window. What they miss is that absent the broken window, the shopkeeper would have bought something else with her money. In reality the economy is unchanged in the aggregate.

Well said, though allow me to augment that final excerpt by pointing out that the economy actually does change when income is redistributed, albeit in the wrong direction.

This is because many redistribution programs give people money, but only if they don’t work or earn only small amounts of income. And less labor in the economy means less output.

In effect, redistribution programs create very high implicit tax rates on being productive, which is why welfare programs trap people in government dependency.

Last but not least, let’s preemptively deal with a couple of Keynesian counter-arguments.

They often argue, for instance, that redistribution is good for growth because lower-income people have a higher “marginal propensity to consume.”

That’s true, but irrelevant. Even if other people are more likely to save, the money doesn’t disappear. As Prof. Dorfman explained, money that goes into the financial system is lent out to other people.

At this point, a clever Keynesian will argue that the money won’t get lent if overall economic conditions are weak. And there is some evidence this is true.

But those weak conditions generally are associated with periods when the burden of government is climbing, so the real lesson is that there’s no substitute for a policy of free markets and small government.

P.S. Here’s the video I narrated for the Center for Freedom and Prosperity about Keynesianism.

P.P.S. Advocates of Keynesian economics make some very weird arguments to justify more government spending.

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Although it doesn’t get nearly as much attention as it warrants, one of the greatest threats to liberty and prosperity is the potential curtailment and elimination of cash.

As I’ve previously noted, there are two reasons why statists don’t like cash and instead would prefer all of us to use digital money (under their rules, of course, not something outside their control like bitcoin).

First, tax collectors can’t easily monitor all cash transactions, so they want a system that would allow them to track and tax every possible penny of our income and purchases.

Second, Keynesian central planners would like to force us to spend more money by imposing negative interest rates (i.e., taxes) on our savings, but that can’t be done if people can hold cash.

To provide some background, a report in the Wall Street Journal looks at both government incentives to get rid of high-value bills and to abolish currency altogether.

Some economists and bankers are demanding a ban on large denomination bills as one way to fight the organized criminals and terrorists who mainly use these notes. But the desire to ditch big bills is also being fueled from unexpected quarter: central bank’s use of negative interest rates. …if a central bank drives interest rates into negative territory, it’ll struggle to manage with physical cash. When a bank balance starts being eaten away by a sub-zero interest rate, cash starts to look inviting. That’s a particular problem for an economy that issues high-denomination banknotes like the eurozone, because it’s easier for a citizen to withdraw and hoard any money they have got in the bank.

Now let’s take a closer look at what folks on the left are saying to the public. In general, they don’t talk about taxing our savings with government-imposed negative interest rates. Instead, they make it seem like their goal is to fight crime.

Larry Summers, a former Obama Administration official, writes in the Washington Post that this is the reason governments should agree on a global pact to eliminate high-denomination notes.

…analysis is totally convincing on the linkage between high denomination notes and crime. …technology is obviating whatever need there may ever have been for high denomination notes in legal commerce. …The €500 is almost six times as valuable as the $100. Some actors in Europe, notably the European Commission, have shown sympathy for the idea and European Central Bank chief Mario Draghi has shown interest as well.  If Europe moved, pressure could likely be brought on others, notably Switzerland. …Even better than unilateral measures in Europe would be a global agreement to stop issuing notes worth more than say $50 or $100.  Such an agreement would be as significant as anything else the G7 or G20 has done in years. …a global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against “big money” and for the interests of ordinary citizens.

Summers cites a working paper by Peter Sands of the Kennedy School, so let’s look at that argument for why governments should get rid of all large-denomination currencies.

Illegal money flows pose a massive challenge to all societies, rich and poor. Tax evasion undercuts the financing of public services and distorts the economy. Financial crime fuels and facilitates criminal activities from drug trafficking and human smuggling to theft and fraud. Corruption corrodes public institutions and warps decision-making. Terrorist finance sustains organisations that spread death and fear. The scale of such illicit money flows is staggering. …Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note. …Without being able to use high denomination notes, those engaged in illicit activities – the “bad guys” of our title – would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their “business models”.

Are these compelling arguments? Should law-abiding citizens be forced to give up cash in hopes of making life harder for crooks? In other words, should we trade liberty for security?

From a moral and philosophical perspective, the answer is no. Our Founders would be rolling in their graves at the mere thought.

But let’s address this issue solely from a practical, utilitarian perspective.

The first thing to understand is that the bad guys won’t really be impacted. The head the The American Anti-Corruption Institute, L. Burke Files, explains to the Financial Times why restricting cash is pointless and misguided.

Peter Sands…has claimed that removal of high-denomination bank notes will deter crime. This is nonsense. After more than 25 years of investigating fraudsters and now corrupt persons in more than 90 countries, I can tell you that only in the extreme minority of cases was cash ever used — even in corruption cases. A vast majority of the funds moved involved bank wires, or the purchase and sale of valuable items such as art, antiquities, vessels or jewellery. …Removal of high denomination bank notes is a fruitless gesture akin to curing the common cold by forbidding use of the term “cold”.

In other words, our statist friends are being disingenuous. They’re trying to exploit the populace’s desire for crime fighting as a means of achieving a policy that actually is designed for other purposes.

The good news, is that they still have a long way to go before achieving their goals. Notwithstanding agitation to get rid of “Benjamins” in the United States, that doesn’t appear to be an immediate threat. Additionally, according to SwissInfo, is that the Swiss government has little interest in getting rid of the CHF1,000 note.

The European police agency Europol, EU finance ministers and now the European Central Bank, have recently made noises about pulling the €500 note, which has been described as the “currency of choice” for criminals. …But Switzerland has no plans to follow suit. “The CHF1,000 note remains a useful tool for payment transactions and for storing value,” Swiss National Bank spokesman Walter Meier told swissinfo.ch.

This resistance is good news, and not just because we want to control rapacious government in North America and Europe.

A column for Yahoo mentions the important value of large-denomination dollars and euros in less developed nations.

Cash also has the added benefit of providing emergency reserves for people “with unstable exchange rates, repressive governments, capital controls or a history of banking collapses,” as the Financial Times noted.

Amen. Indeed, this is one of the reasons why I like bitcoin. People need options to protect themselves from the consequences of bad government policy, regardless of where they live.

By the way, if you’ll allow me a slight diversion, Bill Poole of the University of Delaware (and also a Cato Fellow) adds a very important point in a Wall Street Journal column. He warns that a fixation on monetary policy is misguided, not only because we don’t want reckless easy-money policy, but also because we don’t want our attention diverted from the reforms that actually could boost economic performance.

Negative central-bank interest rates will not create growth any more than the Federal Reserve’s near-zero interest rates did in the U.S. And it will divert attention from the structural problems that have plagued growth here, as well as in Europe and Japan, and how these problems can be solved. …Where central banks can help is by identifying the structural impediments to growth and recommending a way forward. …It is terribly important that advocates of limited government understand what is at stake. …calls for a return to near-zero or even negative interest rates…will do little in the short run to boost growth, but it will dig the federal government into a deeper fiscal hole, further damaging long-run prospects. It needs to be repeated: Monetary policy today has little to offer to raise growth in the developed world.

Let’s close by returning to the core issue of whether it is wise to allow government the sweeping powers that would accompany the elimination of physical currency.

Here are excerpts from four superb articles on the topic.

First, writing for The American Thinker, Mike Konrad argues that eliminating cash will empower government and reduce liberty.

Governments will rise to the occasion and soon will be making cash illegal.  People will be forced to put their money in banks or the market, thus rescuing the central governments and the central banks that are incestuously intertwined with them. …cash is probably the last arena of personal autonomy left. …It has power that the government cannot control; and that is why it has to go. Of course, governments will not tell us the real reasons.  …We will be told it is for our own “good,” however one defines that. …What won’t be reported will be that hacking will shoot up.  Bank fraud will skyrocket. …Going cashless may ironically streamline drug smuggling since suitcases of money weigh too much. …The real purpose of a cashless society will be total control: Absolute Total Control. The real victims will be the public who will be forced to put all their wealth in a centralized system backed up by the good faith and credit of their respective governments.  Their life savings will be eaten away yearly with negative rates. …The end result will be the loss of all autonomy.  This will be the darkest of all tyrannies.  From cradle to grave one will not only be tracked in location, but on purchases.  Liberty will be non-existent. However, it will be sold to us as expedient simplicity itself, freeing us from crime: Fascism with a friendly face.

Second, the invaluable Allister Heath of the U.K.-based Telegraph warns that the desire for Keynesian monetary policy is creating a slippery slope that eventually will give governments an excuse to try to completely banish cash.

…the fact that interest rates of -0.5pc or so are manageable doesn’t mean that interest rates of -4pc would be. At some point, the cost of holding cash in a bank account would become prohibitive: savers would eventually rediscover the virtues of stuffed mattresses (or buying equities, or housing, or anything with less of a negative rate). The problem is that this will embolden those officials who wish to abolish cash altogether, and switch entirely to electronic and digital money. If savers were forced to keep their money in the bank, the argument goes, then they would be forced to put up with even huge negative rates. …But abolishing cash wouldn’t actually work, and would come with terrible side-effects. For a start, people would begin to treat highly negative interest rates as a form of confiscatory taxation: they would be very angry indeed, especially if rates were significantly more negative than inflation. …Criminals who wished to evade tax or engage in illegal activities would still be able to bypass the system: they would start using foreign currencies, precious metals or other commodities as a means of exchange and store of value… The last thing we now need is harebrained schemes to abolish cash. It wouldn’t work, and the public rightly wouldn’t tolerate it.

The Wall Street Journal has opined on the issue as well.

…we shouldn’t be surprised that politicians and central bankers are now waging a war on cash. That’s right, policy makers in Europe and the U.S. want to make it harder for the hoi polloi to hold actual currency. …the European Central Bank would like to ban €500 notes. …Limits on cash transactions have been spreading in Europe… Italy has made it illegal to pay cash for anything worth more than €1,000 ($1,116), while France cut its limit to €1,000 from €3,000 last year. British merchants accepting more than €15,000 in cash per transaction must first register with the tax authorities. …Germany’s Deputy Finance Minister Michael Meister recently proposed a €5,000 cap on cash transactions. …The enemies of cash claim that only crooks and cranks need large-denomination bills. They want large transactions to be made electronically so government can follow them. Yet…Criminals will find a way, large bills or not. The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. …Negative rates are a tax on deposits with banks, with the goal of prodding depositors to remove their cash and spend it… But that goal will be undermined if citizens hoard cash. …So, presto, ban cash. …If the benighted peasants won’t spend on their own, well, make it that much harder for them to save money even in their own mattresses. All of which ignores the virtues of cash for law-abiding citizens. Cash allows legitimate transactions to be executed quickly, without either party paying fees to a bank or credit-card processor. Cash also lets millions of low-income people participate in the economy without maintaining a bank account, the costs of which are mounting as post-2008 regulations drop the ax on fee-free retail banking. While there’s always a risk of being mugged on the way to the store, digital transactions are subject to hacking and computer theft. …the reason gray markets exist is because high taxes and regulatory costs drive otherwise honest businesses off the books. Politicians may want to think twice about cracking down on the cash economy in a way that might destroy businesses and add millions to the jobless rolls. …it’s hard to avoid the conclusion that the politicians want to bar cash as one more infringement on economic liberty. They may go after the big bills now, but does anyone think they’d stop there? …Beware politicians trying to limit the ways you can conduct private economic business. It never turns out well.

Last, but not least, Glenn Reynolds, a law professor at the University of Tennessee, explores the downsides of banning cash in a column for USA Today.

…we need to restore the $500 and $1000 bills. And the reason is that people like Larry Summers have done a horrible job. …What is a $100 bill worth now, compared to 1969? According to the U.S. Inflation Calculator online, a $100 bill today has the equivalent purchasing power of $15.49 in 1969 dollars. …And although inflation isn’t running very high at the moment, this trend will only continue. If the next few decades are like the last few, paper money in current denominations will become basically useless. …to our ruling class this isn’t a bug, but a feature. Governments want to get rid of cash… But at a time when, almost no matter where you look in the world, the parts of it controlled by the experts and technocrats (like Larry Summers) seem to be doing badly, it seems reasonable to ask: Why give them still more control over the economy? What reason is there to think that they’ll use that control fairly, or even competently? Their track record isn’t very impressive. Cash has a lot of virtues. One of them is that it allows people to engage in voluntary transactions without the knowledge or permission of anyone else. Governments call this suspicious, but the rest of us call it something else: Freedom.

Amen. Glenn nails it.

Banning cash is a scheme concocted by politicians and bureaucrats who already have demonstrated that they are incapable of competently administering the bloated public sector that already exists.

The idea that they should be given added power to extract more of our money and manipulate our spending is absurd. Laughably absurd if you read Mark Steyn.

P.S. I actually wouldn’t mind getting rid of the government’s physical currency, but only if the result was a system that actually enhanced liberty and prosperity. Unfortunately, I don’t expect that to happen in the near future.

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I don’t know whether Keynesian economics is best described as a perpetual motion machine or a Freddy Krueger movie (or perhaps even the man behind the curtain in the Wizard of Oz), but it’s safe to say I’ll be fighting this pernicious theory until my last breath.

keynesian-fire1That’s because evidence doesn’t seem to have any impact on the debate.

It doesn’t matter that Keynesian spending binges didn’t work for Hoover and Roosevelt in the 1930s. Or for Japan in the 1990s. Or for Bush or Obama in recent years.

What does matter, by contrast, is that politicians instinctively like Keynesianism because it tells them their vice is a virtue. Instead of being a bunch of hacks that can’t resist overspending in their quest to buy votes, Keynesian theory tells them that they are “compassionate” souls simply trying to “stimulate” the economy.

And to make matters worse, there are plenty of economists (many of whom are on the government teat) who act as enablers, telling politicians that bigger government somehow can jump-start growth.

For instance, the Paris-based Organization for Economic Cooperation and Development (OECD) has just issued recommendations for ways to boost a sluggish global economy. Given that the organization’s lavish budget comes from its member governments, you won’t be surprised that it is licking the hand that feeds it and recommending that politicians should get to spend more money.

A stronger collective fiscal policy response is needed to support growth… Governments in many countries are currently able to borrow for long periods at very low interest rates, which in effect increases fiscal space. Many countries have room for fiscal expansion to strengthen demand. …Investment spending has a high-multiplier, while quality infrastructure projects would help to support future growth.

If the OECD is right, there are supposedly a lot of “shovel-ready” infrastructure jobs that would be wise investments, so why not borrow lots of money in today’s low-interest rate environment, finance a bunch of new spending, and magically boost growth at the same time?

Needless to say, I’m very skeptical about the federal government having an infrastructure party. We would get a bunch of bridges to nowhere, lots of fat contracts to line the pockets of unions, some mass transit boondoggles, and more horror stories about cost overruns.

Oh, and don’t forget that the politicians would decide that all sorts of additional categories of spending count as “investment,” so money also would get squandered in other areas as well.

But let’s set that aside and deal with the underlying economic issue of so-called stimulus.

Politicians in America and elsewhere engaged in several years of Keynesian spending when the downturn began in 2008. That didn’t work. In more recent years, they’ve been engaging in lots of Keynesian monetary policy, and that hasn’t been working either.

Now they want to return to the option of more deficit spending.

Why should we believe that a policy that has repeatedly failed in the past somehow will work this time?

If you ask the OECD bureaucrats, they say it will work because they have a model that’s programmed to say more government spending is good for growth.

I’m not joking. Just like the Congressional Budget Office, the OECD uses a model that automatically assumes that more spending will lead to more growth. So you plug in a number for some “stimulus” outlays and the model mechanically cranks out data showing better performance.

Here’s what the OECD is claiming.

Gee, if this is accurate, why don’t we have governments confiscate all the money in the economy, spend it on so-called public investment, and then we can all be rich!

Actually, I shouldn’t joke. Some Keynesian reader might take the idea and run with it.

P.S. What makes all this especially irritating is that American taxpayers are subsidizing the OECD’s statism.

And it’s not just this recent foray into Keynesian economics. Here are other examples of the OECD pushing policies that are directly contrary to the interests of the American people.

Now you can understand why I rank the OECD as the worst international bureaucracy.

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If everyone has a cross to bear in life, mine is the perplexing durability of Keynesian economics.

I thought the idea was dead when Keynesians incorrectly said you couldn’t have simultaneously rising inflation and unemployment like we saw in the 1970s.

Then I thought the idea was buried even deeper when the Keynesians were wrong about simultaneously falling inflation and unemployment like we saw in the 1980s.

I also believed that the idea was discredited because Keynesian stimulus schemes didn’t work for Hoover and Roosevelt in the 1930s. They didn’t work for Japan in the 1990s. And they didn’t work for Bush or Obama in recent years.

Last but not least, I figured Keynesian economics no longer would pass the laugh test because of some very silly statements by Paul Krugman.

He stated a couple of years ago that it would be good for growth if everyone thought the world was going to be attacked by aliens because that would trigger massive military outlays.

He also asserted more recently that a war would be very beneficial to the economy.

Equally bizarre, he really said that the terrorist attacks on the World Trade Center would “do some economic good” because of the subsequent money spent on rebuilding.

Wow. I guess the moral of the story is that we should destroy lots of wealth because it’s good for prosperity. Just like we should eat more cheeseburgers to lose weight.

So you can see why I’m frustrated. It seems that evidence and logic don’t matter in this debate.

But maybe this latest example of Keynesian malpractice will finally open some eyes. The International Monetary Fund recently published a study asserting that higher spending on refugees would be good for European economies.

I’m not joking. Here are some excerpts from that report.

In the short term, the macroeconomic effect from the refugee surge is likely to be a modest increase in GDP growth, reflecting the fiscal expansion associated with support to the asylum seekers… In the short term, additional public spending for the provision of first reception and support services to asylum seekers, such as housing, food, health and education, will increase aggregate demand. …Relative to the baseline, the level of GDP is lifted by about 0.05, 0.09, and 0.13 percent for 2015, 2016, and 2017, respectively (solid line in the chart below, representing the response of EU GDP as a whole). For the first year, the output impact is entirely due to the aggregate demand impact of the additional fiscal spending.

To understand the implications of what the IMF is claiming, let’s review some basic facts, all of which presumably are uncontroversial.

First, we know that economic output is the result of capital and labor being mixed together to produce goods and services.

Second, we know that growth occurs when the amount of output increases, which implies increases in the quantity and/or quality of labor and capital.

Third, we know that the influx of migrants to Europe will lead governments to divert additional resources from the private sector to finance various programs.

Now let’s think about the IMF’s assertion. The bureaucrats are basically arguing that letting governments take a bigger slice of the pie somehow is going to increase the size of the pie.

If you’re wondering how this makes sense, welcome to the club.

The only way this analysis possibly could be true is if governments finance the additional spending by borrowing from foreigners. But even that’s not really right because all that’s increasing is domestic consumption, not domestic output.

In other words, it’s like running up your credit card to live beyond your means when the real goal should be increasing your income.

But maybe you don’t want to believe me, so let’s look at some other voices.

The top economist of Germany’s Finance Ministry, Ludger Schuknecht, writes in the Financial Times about the perils of never-ending Keynesianism.

…after decades of attempts to fine-tune the economic cycle by running fiscal deficits and cutting interest rates at times of weak demand, many economies are fragile. …Government deficits and private-sector debt are at high levels in emerging markets, and many western ones too. Ageing populations are weighing on public finances. …Traders gamble on continued bailouts. …Yet this lesson goes largely unheeded; policymakers are urged to pile more debt on the existing mountain. …The work of repairing public sector balance sheets has ground to a halt almost everywhere. …Public debt in many countries is now well above 100 per cent of gross domestic product. …nations lacking resilience increasingly rely on support from others… This creates a new form of moral hazard: since countries that behave recklessly will be bailed out, they have little incentive to reform. …talk of global safety nets is futile, and focusing…on stimulus is outright frivolous.

I’m not a huge fan of German fiscal policy. Tax rates are too high and the burden of government spending is excessive. Heck, they’ve even figured out how to use parking meters to tax prostitutes!

But at least the Germans aren’t big believers in Keynesian pixie dust (and you won’t be surprised to learn Krugman goofed when trying to claim Germany was a Keynesian success story).

In any event, Schuknecht realizes that there’s a point beyond which more spending and more so-called stimulus is simply impractical.

Which is basically the main point in a column by Daniel Finkelstein in the U.K.-based Times. He’s writing about the attacks on “austerity” and is unimpressed by the financial literacy (or lack thereof) on the part of critics.

If I went to…buy a new sweater and decided not to get one because it was too expensive, would I be making an ideological statement about shopping? …Or would I just be, like, putting up with my old sweater for the time being while I saved up a bit of money? …Apparently my innocent view that it is a good idea to be able to pay for the goods you purchase makes me a small-state neo-liberal Tory free market fundamentalist. Which seems quite a complicated description for just wanting things to add up. …Between 2000 and 2006, Gordon Brown and Tony Blair engaged in a structural increase in public spending without a matching increase in taxation. You cannot do this for ever. …one thing is clear. Two plus two has to equal four. However unpopular that is.

By the way, if you read the entire piece, it’s rather obvious that Mr. Finkelstein is not a “small-state…free market fundamentalist.”

He simply understands that an ever-expanding public sector simply doesn’t work.

Which reminds me of a very wise observation by Tyler Cowen.

…at the popular level, there is a confusion between “austerity is bad” and “the consequences of running out of money are bad.”

In other words, this issue is partly about the putative value of Keynesian economics and partly about whether nations get to the point where Keynesian policy simply isn’t practical.

To cite an example, Switzerland or Hong Kong have what’s called “fiscal space” to engage in Keynesianism, while Greece and Italy don’t.

Of course, one of the reasons that Greece and Italy don’t have any flexibility is that politicians in those nations have rationalized ever-larger public sectors. And now, they’ve finally reach the point Margaret Thatcher warned about: They’ve run out of other people’s money (both in terms of what they can tax and what they can borrow).

Meanwhile, Hong Kong and Switzerland are in good shape because they generally have avoided Keynesian stimulus schemes and definitely have policies to constrain the overall size of the public sector.

For further information, here’s my video on Keynesian economics.

P.S. But if you want more cartoons about Keynesian economics, click here, here, here, and here.

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I wrote yesterday that governments want to eliminate cash in order to make it easier to squeeze more money from taxpayers.

But that’s not the only reason why politicians are interested in banning paper money and coins.

They also are worried that paper money inhibits the government’s ability to “stimulate” the economy with artificially low interest rates. Simply stated, they’ve already pushed interest rates close to zero and haven’t gotten the desired effect of more growth, so the thinking in official circles is that if you could implement negative interest rates, people could be pushed to be good little Keynesians because any money they have in their accounts would be losing value.

I’m not joking.

Here’s some of what Kenneth Rogoff, a professor at Harvard and a former economist at the International Monetary Fund, wrote for the U.K.-based Financial Times.

Getting rid of physical currency and replacing it with electronic money would…eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash.

And here are some passages from an editorial that also was published in the FT.

…authorities would do well to consider the arguments for phasing out their use as another “barbarous relic”…even a little physical currency can cause a lot of distortion to the economic system. The existence of cash — a bearer instrument with a zero interest rate — limits central banks’ ability to stimulate a depressed economy.

Meanwhile, Bloomberg reports that the Willem Buiter of Citi (the same guy who endorsed military attacks on low-tax jurisdictions) supports the elimination of cash.

Citi’s Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates. …the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction? Cash therefore gives people an easy and effective way of avoiding negative nominal rates. …Buiter’s solution to cash’s ability to allow people to avoid negative deposit rates is to abolish cash altogether.

So are they right? Should cash be abolished so central bankers and governments have more power to manipulate the economy?

There’s a lot of opposition from very sensible people, particularly in the United Kingdom where the idea of banning cash is viewed as a more serious threat.

Allister Heath of the U.K.-based Telegraph worries that governments would engage in more mischief if a nation got rid of cash.

Many of our leading figures are preparing to give up on sound money. The intervention I’m most concerned about is Bank of England chief economist Andrew Haldane’s call for a 4pc inflation target, as well as his desire to abolish cash, embrace a purely electronic currency and thus make it easier for the Bank to impose substantially negative interest rates… Imagine that banks imposed -4pc interest rates on savings today: everybody would pull cash out and stuff it under their mattresses. But if all cash were digital, they would be trapped and forced to hand over their money. …all spending would become subject to the surveillance state, dramatically eroding individual liberty. …Money is already too loose – turning on the taps would merely further fuel bubbles at home and abroad.

Also writing for the Telegraph, Matthew Lynn expresses reservations about this trend.

As for negative interest rates, do we really want those? Or have we concluded that central bankers are doing more harm than good with their attempts to manipulate the economy? …a banknote is an incredibly efficient way to handle small transactions. It is costless, immediate, flexible, no one ever needs a password, it can’t be hacked, and the system doesn’t ever crash. More importantly, cash is about freedom. There are surely limits to the control over society we wish to hand over to governments and central banks? You don’t need to be a fully paid-up libertarian to question whether…we really want the banks and the state to know every single detail of what we are spending our money on and where. It is easy to surrender that freedom – but it will be a lot harder to get back.

Merryn Somerset Webb, a business writer from the U.K., is properly concerned about the economic implications of a society with no cash.

…at the beginning of the financial crisis, there was much talk about financial repression — the ways in which policymakers would seek to control the use of our money to deal with out-of-control public debt. …We’ve seen capital controls in the periphery of the eurozone… Interest rates everywhere have been at or below inflation for seven years — and negative interest rates are now snaking their nasty way around Europe… This makes debt interest cheap for governments…and it and forces once-prudent savers to move their money into the kind of risky assets that are supposed to drive growth (and tax receipts).

Amen. She’s right that low interest rates are good news for governments and not very good news for people in the productive sector.

Last but not least, Chris Giles wrote a column for the FT and made one final point that is very much worth sharing.

Mr Haldane’s proposal to ban cash has all the hallmarks of a public official confusing what is convenient for the central bank with what is in the public interest.

Especially since the central bankers are probably undermining long-run economic prosperity with short-run tinkering.

Moreover, the option to engage in Keynesian monetary policy also gives politicians an excuse to avoid the reforms that actually would boost economic performance. Indeed, it’s quite likely that an easy-money policy exacerbates the problems caused by bad fiscal and regulatory policy.

Let’s conclude by noting that maybe the right approach isn’t to give politicians and central bankers more control over money, but rather to reduce government’s control over money. That’s one of the arguments I made in this video I narrated for the Center for Freedom and Prosperity.

P.S. By the way, Ryan McKaken at the Mises Institute identifies a third reason why politicians would prefer a cash-free society.

…the elimination of physical cash makes it easier for the state to keep track of private persons, and it assists central banks in efforts to punish saving and expand the money supply by implementing negative interest rate schemes. A third advantage of the elimination of physical cash would be to more easily control people and potential dissidents through the freezing of their bank accounts.

Excellent point. We’ve already seen how asset forfeiture allows governments to steal people’s bank accounts without any conviction of wrongdoing. Imagine the damage politicians and bureaucrats could do if they had even more control over our money.

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I don’t know if this is a good personality trait or a character flaw, but it always brings a big smile to my face when a leftist tries to argue for bigger government but inadvertently makes an argument in favor of smaller government. Sort of like scoring a goal against your own team in soccer.

It seems to happens quite a bit at the New York Times.

A New York Times columnist, for instance, pushed for a tax-hiking fiscal agreement back in 2011 based on a chart showing that the only successful budget deal was the one that cut taxes.

The following year, another New York Times columnist accidentally demonstrated that politicians are trying to curtail tax competition because they want to increase overall tax burdens.

In a major story on the pension system in the Netherlands this year, the New York Times inadvertently acknowledged that genuine private savings is the best route to obtain a secure retirement.

But it’s not just people who write for the New York Times.

The International Monetary Fund accidentally confirmed that the value-added tax is a revenue machine to finance bigger government and heavier tax burdens.

A statist in Illinois tried to argue that higher taxes don’t enable higher spending, but his argument was based on the fact that politicians raised taxes so they wouldn’t have to cut spending.

We now have another example of a leftist inadvertently making an argument in favor of limited government (h/t: Coyote Blog via Cafe Hayek).

Kevin Drum of Mother Jones recently published an article that includes a chart showing that private-sector job creation has been much stronger under Obama’s recovery than during Bush’s recovery.

So how do we interpret this data?

I think one interpretation, as I argued both in 2012 and in 2013, is that gridlock is good for the economy. As you can see from Drum’s chart, job creation in the private sector jumped significantly toward the end of 2010, just as the GOP took control of the House of Representatives.

It’s quite reasonable to think, after all, that the private sector greeted the development with a sigh of relief since it meant Obama would be stymied if he tried to impose any major new fiscal or regulatory burdens through the legislative process.

Drum, however, accidentally gives us another reason why private-sector job creation has been at least somewhat impressive. Writing last year, he showed that the overall burden of government spending has been on a downward trajectory.

Here’s a chart from that article. He looks at inflation-adjusted per-capita total government spending, including outlays at the state and local level. If you look at the red line, which measures what’s been happening since the summer of 2009, you can see that we’re actually making some progress in reducing the burden of government spending.

Drum, needless to say, wants people to believe the downward trend in overall spending is somehow bad for the economy.

…as the chart above shows. After every other recent recession, government spending has continued rising steadily throughout the recovery, providing a backstop that prevented the economy from sliding backward. …But this time, even though the 2008 recession was deeper than any of those previous ones, it didn’t. …total government spending peaked in the second quarter of 2010 and then started falling, falling, and falling some more. Today, government spending at all levels—state, local, and federal combined—has declined 7 percent

I haven’t fact-checked Drum’s specific calculations, but I assume his math is correct. After all, I showed earlier this month that federal government spending has been flat for the past five years, and I was looking at nominal data rather than inflation-adjusted or population-adjusted numbers.

Likewise, I shared a chart last month showing that state and local government spending also has been flat since about 2010.

But the quality of the numbers isn’t my main point. Let’s focus instead on the accidental message of Drum’s two charts. If you put them together, as was done by Warren Meyer of Coyote Blog, then you see a clear correlation. Under Bush, government spending increased during the recovery and private-sector job creation was nonexistent. But under Obama, there’s been a decline in government spending and private-sector job creation has been far more impressive.

In other words, the message of Drum’s two charts is precisely the opposite of what he wants us to believe.

Instead of achieving his goal of demonstrating that Keynesian “stimulus” is desirable, Drum instead has demonstrated that spending cuts are associated with better economic performance.

Maybe we need some sort of “Wrong Way Corrigan” Award for people like Drum who inadvertently help the cause of economic liberty.

Though, to be fair, we’re only talking about two data series (private-sector jobs and overall government spending) and we’re only looking at two recoveries (2001 and 2007), so I imagine Drum and others could concoct semi-plausible explanations for why the aforementioned correlation doesn’t imply causation.

After all, crowing roosters don’t cause the sun to rise.

This is why I’m a big believer in looking at overall economic policy over long periods of time. All sorts of quirks may explain why one country grows faster than another country in any given year. But when you look at several decades of data, then certain relationships become clear.

And when you compare long-run economic performance in market-oriented nations and statist countries, there’s only one logical conclusion. If you don’t believe me, just check out these differences:

P.S. By the way, job creation hasn’t been that impressive during the Obama years. Yes, there have been more jobs created (particularly private-sector jobs) during the current recovery compared to the post-2001 recovery, but check out this data from the Minneapolis Fed showing the Obama recovery (red), the Bush recovery (green), and the Reagan recovery (blue).

Obama has done better than Bush, but Reagan is the slam-dunk winner.

But it’s not just that Reagan’s recovery was far better than what we got under Bush and Obama. If you added every single recovery to the chart, the 2001 and 2007 recoveries would be the weakest.

So maybe the lesson is that statist economic policy (of all types, not just fiscal policy) is a bad idea, regardless of whether a politician is Republican or Democrat.

Hmmm….it’s almost enough to make one think that free markets and small government are a recipe for prosperity.

And maybe this is why statists still don’t have an acceptable answer for my two-part challenge.

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The United States is supposed to be enjoying a recovery. Indeed, we’re now supposedly in the fifth year of an expanding economy.

Many Americans must wonder why it doesn’t feel that way.

In part, that’s because growth has been very anemic. Indeed, this is the weakest recovery since the Great Depression.

But it’s also because the labor market has been very weak.

Most observers correctly note that there are far fewer jobs than Obama promised if the so-called stimulus was enacted.

I think that’s a very fair complaint, but I’m even more concerned about the very troubling drop in the employment-population ratio and the grim data on long-run joblessness.

Simply stated, our economy’s ability to generate prosperity is a function of the quantity and quality of labor and capital that are being utilized.

So it’s very bad news when millions of workers drop out of the labor force.

So how can we rejuvenate job creation?

I addressed this issue in a column for The Federalist. Here’s some of what I wrote, starting with a generic complaint that the crowd in Washington seems to think that “more government” is the answer to every question.

The discussion in Washington over how best to “create” jobs is a bit surreal. In part, this is a semantic gripe. …jobs are created in the private sector, not by politicians. …Politicians would probably admit that they simply want to “create” the conditions that lead to job creation. But even by that more realistic standard, the Washington debate often is surreal for the simple reason that too many politicians think that a larger burden of government will boost job creation.

President Obama clearly is guilty of this form of hubris.

I touch on several points in the article, but this excerpt highlights his ongoing fixation on Keynesian economics, which I’ve previously referred to as the perpetual motion machine of the left.

President Obama, for instance, routinely urges more government spending to “stimulate” job creation. …The new outlays, we are told, inject money into the economy and jump-start growth, leading to more jobs as businesses increase production in response to higher demand.The problem with this argument, as explained in an earlier Federalist article, is that government can’t inject money into the economy without first taking money out of the economy, either by borrowing or taxation. This is why Keynesian spending didn’t work for Herbert Hoover and Franklin Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, or Obama in 2009.

But the me-too crowd on the right commits the same sins.

While the left has bad ideas and has delivered poor results, some proposals from the “right” aren’t much better. Consider a recent article in National Affairs by Michael Strain of the American Enterprise Institute. Entitled “A Jobs Agenda for the Right,” the piece is filled with proposals that are distressingly reminiscent of the big-government-lite platform of pre-Reagan Republicans.

Do you think I’m exaggerating?

You can click on his article and see for yourself. You’ll find some good information on how the job market is very weak.

But when Strain proposes solutions, he goes awry. As I say in the article, many of his policy ideas “could have been uttered by Harry Reid or Nancy Pelosi.”

He writes that “conservatives should see that there is a role for macroeconomic stimulus.” …He claims, for instance, that “government spending can support economic growth during a recession” That Keynesian statement sounds more like Brookings than AEI. He also has Obama’s faith in “shovel-ready jobs,” extolling “the desirability of a multi-year program of high-social-value infrastructure spending.” …He wants to finance additional spending, at least in part, with higher taxes, suggesting “a reining in of tax expenditures.” There’s nothing wrong with cutting back on tax preferences (properly defined), but the money should be used to lower tax rates rather than expand the burden of government spending. …he endorsed extended unemployment benefits – notwithstanding the wealth of evidence that such policies encourage joblessness.

To be fair, he does list some ideas that are good, as well as some that are mixed, but the unambiguous message of his article is that government needs to play an activist role to boost the job market.

Needless to say, I offer my prescription for job creation and suggest that we go in the opposite direction.

I make (what should be) an elementary observation about the conditions that are necessary for businesses to hire new workers.

[Jobs] are created when businesses think that the amount of revenue generated by new employees will exceed the total costs (including those imposed by government) of putting those people on the payroll.

And I elaborate on this point, quoting myself in the article (and now I’m quoting myself quoting myself, which is definitely a sign I’ve been in DC too long).

It may not be an agenda tailored to appeal to politicians, who generally want to be seen as “doing something,” but the best way to create jobs is to get government to stop trying to help. Free markets and small government are far more likely to produce the conditions that lead to more employment. In other words, let the private sector flourish. The pursuit of profit is a powerful force for growth. To quote one of my favorite people, “businesses are not charities. They only create jobs when they think that the total revenue generated by new workers will exceed the total cost of employing those workers. In other words, if it’s not profitable to hire workers, it’s not going to happen.” …If we really care about workers, particularly those without jobs, the most compassionate approach is prosperity rather than dependency.

And that means free markets and small government.

Which is the direction we headed during the Reagan years and Clinton years, when we enjoyed very good performance in labor markets (as illustrated by this Michael Ramirez cartoon).

But the 21st century has been very bad news for economic freedom.

P.S. In a postscript last week, I shared a very amusing image of Obama and Putin on a horse.

In that same spirit, here’s a phone call between a statist who doesn’t respect the rule of law…and another statist who doesn’t respect the rule of law.

Obama Putin Phone Call

I’m not sure whether this is better than Obama’s NSA phone-tapping conversation, but still amusing.

By the way, it goes without saying that this doesn’t imply the United States should be intervening. You can read my thoughts here.

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