Leading Keynesian Economist Uses The ‘D’ Word

Most Keynesian economists do not want to admit that we are in another depression. They find the word painful.

They find it painful because it contradicts the idea that Keynesian economic ideas have ended depressions forever. It also contradicts the idea that the massive and continuing Keynesian stimulus applied by world governments since 2008 has worked. For this and other reasons, euphemisms such as the Great Recession have been embraced not only by Keynesian economists, but by their allies in government and in the mainstream press.

I argued that we were in a depression in a January article and again in April. Now Brad DeLong, one of the most prestigious Keynesians, a professor at Berkeley and former deputy assistant secretary of the Treasury under Bill Clinton, says that he agrees. It really is a depression.

DeLong doesn’t blame Keynesianism; that would be too much to expect. But he does call the thing by its right name, which is a major departure from the usual Keynesian style.

These are, after all, the people who call the government creating money out of thin air “quantitative easing,” “bond buying” and the like, all of which are parroted by the press. When John Maynard Keynes did this, he was often being impish, as when he called newly created money “green cheese,” echoing the old nursery nonsense that “the moon is made of green cheese.” His acolytes have adopted the style of dissimulation, but without the slightest trace of a sense of humor.

Although we are in a depression, it is not a depression for everyone, as is by now well known. Even so, the full hit on the middle class and the poor relative to the affluent is not adequately understood. Consider these figures from Larry Lindsey, who served George W. Bush as chief economist at the beginning of the first term, only to be booted from the White House for too much truth telling:

U.S. Household Net Worth 2007-2013

  • Top 1 percent up 1.9 percent
  • Next 9 percent up 3.4 percent
  • Next 15 percent down 0.5 percent
  • Next 25 percent down 16.7 percent
  • Bottom 50 percent down 44.2 percent

None of the economic statistics we get from the government are reliable. Inflation is understated. Economic growth is overstated. Unemployment is understated. But this chart of net worth is about as reliable as we can expect to get.

It tells the story of a middle class in the process of being destroyed and of poor people who will never be able to get into it. It is also noteworthy that the 9 percent below the top 1 percent have done best of all. Although a great many government employee households are in the top 1 percent, a larger number are in the next 9 percent.

Sometimes, the economic statistics are intentionally manipulated. It cannot be a coincidence that the method of calculating inflation changed so much under Clinton. But keep in mind that the statistics also reflect Keynesian assumptions that do not make sense.

In Keynesian theory, it doesn’t matter whether money is spent or invested or what it is spent on or invested in. In this cockeyed view, spending more money to put people into Medicaid, paid for by borrowing from overseas or printing new money, is just as good as Apple’s investing in new jobs.

We saw an example of this in the recent gross domestic product numbers released by the government. Most of the new spending in the first quarter of this year was for healthcare, and most of that was for Medicaid expansion. But it wasn’t even actual, documented spending. It was just a wild, finger-in-the-wind guess by the government.

As a result, the first quarter was initially reported with a minus 1 percent economic growth, then revised to minus 2.9 percent. One idea floating around is that the Commerce Department’s revision reflected a decision to make the first quarter look worse in order to move healthcare spending to the second quarter and, thus, make it look better. If so, why would the second quarter have been deemed more important? It’s because it is leading up to the fall elections. The latest report for the second quarter is 4.2 percent.

The destruction of common-sense economics by Keynesianism is a major reason for what has happened to the American middle class and poor. But our governing elites and special interests do not just love Keynesianism for its own sake. They especially love the opportunity for crony capitalism that it affords. Keynes himself was not financially corrupt, and he would have been appalled to see the corruption he unleashed.

Nor did our present problems arrive in 2007-08. They can be dated at least to the beginning of bubbles and busts during the Clinton administration and arguably even further back.

For example, if we look at what has happened to poor people since the War on Poverty began in the 1960s, we see them earning less and less on their own and sinking even further into poverty, if we exclude growing welfare payments. Analyst John Goodman has calculated that economic growth cut the rate of poverty in half between the end of World War II and 1964, when the War on Poverty was launched. Since then, the percent of people poor would have increased, but for the extraordinary $15 trillion spent by the government, much of it with borrowed funds.

There are those among the top 1 percent and top 10 percent of households who are working on this problem every day. They help the middle class and poor by working hard, saving, making wise investments and hiring, or even by not investing or hiring until conditions are right. There are many others who make it steadily worse by feeding off a corrupt and swollen government and wasting trillions of borrowed or manufactured dollars.

Senator Elizabeth Warren Speaks Up For Progressivism

This article by Hunter Lewis was originally published by AgainstCronyCapitalism.org.

Good for her! Senator Elizabeth Warren (D-Mass.) is letting us know where she stands. There’s no oily evasiveness for her — or at least there’s less than we usually get from politicians.

Here are Warren’s 11 tenets of today’s progressivism, outlined in a July 18 speech before Netroots Nation. Below each tenet are a few questions for her.

1. “We believe that Wall Street needs stronger rules and tougher enforcement, and we’re willing to fight for it.”

Will you fight to end government bailouts? How will you end them if Wall Street is operated as a subsidiary of Washington? How will you end them if Washington needs big Wall Street firms to buy its bonds with money created by Washington?

The real problem here is that government control, tough or not, is destroying the market’s own internal discipline. Markets aren’t just about profits. They are also about bankruptcy. Wall Street firms must be allowed to fail.

2. “We believe in science, and that means that we have a responsibility to protect this Earth.”

So progressivism is backed by science and other political philosophies aren’t? People who disagree with you don’t care about the Earth?

3. “We believe that the Internet shouldn’t be rigged to benefit big corporations, and that means real net neutrality.”

Rigged to benefit big corporations? No. But are you just benefiting some big corporations at the expense of others? What do you mean by “real net neutrality?”

4. “We believe that no one should work full-time and still live in poverty, and that means raising the minimum wage.”

What if someone can’t get a full-time job, perhaps because of Obamacare? Do they get no help?

And how will an increase in the minimum wage help those who can’t get any job because of the minimum wage? How will this help teenagers or other young people get their first job?

The great progressive President Franklin Roosevelt intervened to keep wages high during the Great Depression. The result was that those who succeeded in keeping their jobs were even better off than before, while millions of others were thrown out of work and had nothing.

5. “We believe that fast-food workers deserve a livable wage, and that means that when they take to the picket line, we are proud to fight alongside them.”

Hm. How are you “fighting alongside them” other than giving speeches? Are you fighting for the workers or for the unions? And how much money have you received from unions?

6. “We believe that students are entitled to get an education without being crushed by debt.”

Yes — and then what? Hasn’t the Federal student loan program driven up the cost of a college education, leaving many students worse off than before it existed?

And why is the Federal government borrowing at a low interest rate and then charging the students a much higher rate? How can it be right to make a profit off the students and then apply it to the Federal budget under a line called “deficit reduction.”

7. “We believe that after a lifetime of work, people are entitled to retire with dignity, and that means protecting Social Security, Medicare and pensions.”

How exactly will we do that? Should we keep borrowing from the Chinese in order to “protect” these programs? What kind of protection is that?

8. “We believe — I can’t believe I have to say this in 2014 — we believe in equal pay for equal work.”

Are progressives the only people you think believe in this?

9. “We believe that equal means equal, and that’s true in marriage, it’s true in the workplace, it’s true in all of America.”

Except in Federal programs that discriminate in favor of one group over another? If equal is equal, then why are non-unionized companies barred from Federal construction contracts? Other examples could fill the page.

10. “We believe that immigration has made this country strong and vibrant, and that means reform.”

It may “mean reform,” but what does “reform” mean? This is evasive.

11. “And we believe that corporations are not people, that women have a right to their bodies. We will overturn Hobby Lobby and we will fight for it. We will fight for it!”

If corporations are not people, is it OK for the Federal government to gag their speech, tell them what they must say or not say, and otherwise deny them any of the protections offered by the bill of rights?

Having recited what Warren believes to be the 11 tenets of contemporary progressivism, what does she think that conservatives believe? Here it is: “I got mine. The rest of you are on your own.”

But is this what conservatives teach? Is this even what markets teach? Do they teach us to be selfish? Or do they teach us that we had better put our selfishness aside and tend to the needs of customers and employees first if we want to be successful?

People who run businesses are serving the needs of others. And people who work for the government may be just as selfish as anybody else.

Did Warren describe all the tenets of contemporary progressivism? No, she described the ones she wanted to describe. But let’s leave it for now with her 11.

Why Doesn’t The Fed Lend Each Of Us $10 million?

Wouldn’t that be a good way to jump start the economy?

Sheila Baer, chairman of the Federal Deposit Insurance Corp. during the Crash of 2008, was a lonely voice of sanity at that time. In 2012, she wrote an article for The Washington Post poking fun at the Fed for what it had been doing. It was entitled “Fix Inequality With $10 Million Loans For Everyone.”

Why not, she said, expand the Fed’s current welfare system for banks, financial firms and wealthy investors to everyone else? Why not, in short, create sufficient new money to lend every U.S. household $10 million at zero interest rates?

You might object: How will we pay the money back? But don’t worry. You won’t spend this money. You will just invest it.

If you invest it in 10-year U.S. bonds today, you will earn $300,000 a year, which should be enough to pay down your other debts and get you spending again. If you want to be adventurous, you can invest in foreign bonds paying much more than 3 percent. Some of these bonds would pay you more than $1 million in interest per year.

You won’t be the only one to benefit. All the spending will create new jobs. In a stroke, unemployment will no longer be a problem. And the government will be able to say goodbye to deficits, because there will be a gusher of new tax money coming in.

Baer remained tongue-in-cheek in her article. But lest someone think it is actually a good idea, let’s briefly review what is wrong with this happy picture. If the Fed did lend each household $10 million of newly created money, everyone’s income would soar and so would consumer demand. But the supply of goods and services would remain the same, or perhaps even collapse, because many people would decide to retire and enjoy their new wealth.

With demand for goods and services soaring and supply shrinking, the prices of everything we need would soar, too. Before long, we would find that our fabulous new incomes wouldn’t buy any more than our old ones did.

Unfortunately, creating new money doesn’t create new wealth. It is like pouring water into a bowl of milk and pretending that you have more milk.

OK, you might say, if this is true, why hasn’t the Fed already created runaway inflation? Hasn’t it created trillions of new dollars since the Crash?

Here is the answer. If the Fed had lent millions of dollars directly to consumers, or perhaps just dropped new dollar bills from airplanes (a variant on an idea mentioned by retiring Fed Chairman Ben Bernanke), inflation would be inescapable.

But the Fed didn’t do that. Instead, it made its money available to financial institutions and indirectly to the government. The financial institutions devised numerous imaginative ways to make money on the new money, but very little of it got into the hands of middle-class consumers, the people who can most directly drive up consumer prices. Reported inflation has actually fallen, to a low 1 percent in the United States and only .8 percent in Europe.

Are these inflation figures reliable? Inflation certainly does not feel this low to most people. And, in all probability, it isn’t.

Shortly after Social Security and other government payments were linked to inflation, government statisticians began changing the way inflation is calculated. You won’t be too surprised to learn that much of the re-engineering, which reduced reported inflation, was done by the always clever Bill Clinton Administration.

Business economist John Williams (shadowstats.com) estimates that if we calculated inflation the same way we did in 1980, it would be running at about 9 percent today.

Based on this, are we on the verge of even more consumer price inflation? Is that where all the Fed’s new money creation will lead us? Perhaps, but not necessarily.

When the Fed creates masses of new money, it initially flows to Wall Street; but from there its path is unpredictable.

To the degree that it does reach the average consumer, as we have noted, it will produce consumer price inflation. To the degree that it reaches rich people, it will drive up the prices of what rich people buy. We see this today when a single townhouse in Manhattan is listed for more than $100 million dollars. To the degree that it flows into the stock market, it will raise stock prices. If enough flows in this direction, it will create an asset bubble, only to be followed by a crash, which will in turn bring recession and unemployment.

Wherever the new money flows, it may increase demand in the short run, only to reduce it in the long run. This is because the new money created by the Fed is not just given away. It is made available to banks to lend, which means that it enters the economy as debt. A little debt, especially if spent or invested wisely, may help an economy. But too much will strangle it.

As consumers, businesses and governments become weighed down with more and more debt from the past, especially debt that was spent unwisely, the interest and principal payments become increasingly burdensome. Dollars that might have been spent on new investments with the potential to create new jobs and new income are instead siphoned off to pay for past mistakes. We end up with a zombie economy — still breathing, but just barely.

Historically, we can measure how many dollars of economic growth we get from each new dollar of debt. At the moment, it seems to be negative. In other words, more new debt makes it worse, not better.

Despite this plain evidence, the Fed continues to try to persuade consumers and businesses to increase their borrowing and spending and also underwrites government borrowing and spending. It holds interest rates very low, which for now keeps the debt house of cards from tumbling down.

Will the Fed’s feckless money creation end in inflation or depression? It could go either way. Insofar as it stokes demand, it could lead to inflation. Insofar as it increases an already too heavy debt burden, it could lead instead to recession, joblessness and depression. Or it could lead first to the one and then to the other.

It could also lead to a third possibility: stagflation. In this scenario, consumer prices advance even while unemployment increases. We had this in the 1970s. If we measured inflation as we did in the 1970s, it would be apparent that we already have it today.

The new Fed Chairman, Janet Yellen, says that 2014 will finally bring us back to blue skies, with economic growth picking up. She also believes, relying on government figures, that unemployment is currently 6.8 percent and falling.

What this overlooks is that reported unemployment is falling because more and more people are giving up and dropping out of the labor force. As John Williams points out, the unemployment number, calculated as it once was, would be rising, not falling, and over 20 percent, similar to what we had in the Great Depression.

–Hunter Lewis

Hunter Lewis is co-founder of AgainstCronyCapitalism.org. He is co-founder and former CEO of global investment firm Cambridge Associates, LLC and author of 8 books on moral philosophy, psychology and economics, including the widely acclaimed Are the Rich Necessary? (“Highly provocative and highly pleasurable.”—New York Times) He has contributed to The New York Times, The Times of London, The Washing­ton Post, and The Atlantic Monthly, as well as numerous websites such as Breitbart.com, Forbes.com, Fox.com and RealClearMarkets.com. His most recent books are Crony Capitalism in America: 2008–2012, Free Prices Now! Fixing the Economy by Abolishing the Fed and Where Keynes Went Wrong: And Why Governments Keep Creating Inflation, Bubbles, and Busts. He has served on boards and committees of 15 leading nonprofit organizations, including environmental, teaching, research, and cultural and global development organizations, as well as the World Bank.

Creative Commons License