06 June 2011

How Big is Big Enough?

The great thing about Keynesian economics is that it purports to treat the thoroughly social science of economics as if it were a "hard" science like physics. Every problem can be expressed as an equation. The individual actions of millions of people can be expressed with self-fulfilling identities and oh-so-elegant graphs.
The funny part is that the economists come up with equations after the fact in order to explained what just happened, none of which is, ceteris paribus, repeatable. This is like scientists getting thrilled about predicting a solar eclipse after it happened. And then showing, in no uncertain terms, when it will happen again.
And being completely wrong.
Except, just like their brethren who pretend to predict the weather, economists never seem to be held accountable for all of the times that they are not just wrong, but fabulously wrong.

For illustration, we will take as a case in point the Smartest Man in the Universe, Professor Paul Krugman, Nobel laureate and professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University.

Dr. Krugman has said time and again that the reason that the stimulus passed by President Obama and the Democratic congress in 2009 didn't work was because it was too darn small. To refresh your memories, the administration advocated for and received a "stimulus" package that totaled $787 billion. This was less than 12 months after the Bush administration asked for and received a stimulus package of $152 billion. For those of you at home, that is $939 billion in spending and tax "stimulus" and does not include the two rounds of quantitative easing and other monetary tricks and levers that have been pulled by the Fed, nor does it include the bailouts of the auto industry or the TARP bailouts. Remember also that we were told (by very smart people) that absent this second stimulus package, the unemployment rate would climb up to 9% through the first three quarters of 2010 before edging down slightly and moving toward the "natural" unemployment rate of about 5%. If the stimulus were passed, though, unemployment would top out at about 7.9% in the 3rd quarter of 2009 and then drop slowly towards the natural rate.

I don't think I'm being too out of line to note that we are tip-toeing toward the end of the 2nd quarter of 2011 and unemployment is at 9.1%. So that would mean, not to put too fine a point on it, that they were astoundingly wrong in their projections.

Sherman, set the WABAC machine for November 2008. Our friend Krugman said the stimulus needed to be...how big, Dr. Krugman? "My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion." This was right after President Hope & Change was elected. And, as noted, the stimulus was significantly larger than what the Nobel laureate said it would need to be. Which was already "huge."

But 55 days later, it was too small. And this time, after the basic amount of the stimulus was hashed out, he had some math to show that it just wasn't going to cut it. Where was the math in November? Who knows?

But I do know this...Keynesian economics has been proven wrong. Again. For what would appear to be the thousandth time. Government spending does not "boost" demand. It takes it from elsewhere. What does Dr. Krugman say we should do now? Cut government interference in the market and let prices settle and clear?

Nope. Spend more money. Because even though deficit spending has all sorts of negative consequences, "the United States is able to borrow as of today at 3% interest rates for ten years." He wants to have another round of stimulus, equal to the first round. A total of $1.5 trillion of spending. What should the money that must taken from future generations be spent on? WPA style programs. "Hire a lot of people to people fill potholes." Please see here from about 16:00 to 17:30. The whole thing is a train wreck, and if these gentlemen are really influencing policy (they are), we are doomed. It should be noted that the US economy did rather poorly between Summer 1935 and early winter 1941.

The notion that the "stimulus wasn't big enough" is non-falsifiable. It is, in my opinion, wrong and no government intervention can mitigate or cure an economic bust. But I will readily admit that this is an opinion. So is Krugman's logic. But he doesn't see it that way. None of the Keynesians (and a lot of the monetarists, too) see it that way. Something that is non-falsifiable is not testable. If something can't be tested under controlled circumstances, it can't be proven true or false. That means it isn't science. And I don't care how many equations you come up with after the fact.

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