Monday, November 4, 2013

1930's Economics in the 21st Century

You continue to hear economists bemoan the slow pace of economic growth in the western world.  Europe is still asleep economically and the US barely has a pulse.  All of this, say most economists, is the result of too little deficit spending!

Keynes made this argument in the 1930s when governments were relatively small and, in the US particularly, the reach of government was not very extensive.  Much has changed.

Keynes would not recognize the modern western economies.  Laws that prohibit hiring coupled with elaborate price controls (minimum wage, overtime laws, etc.) and workplace litigation over water-cooler conversations would come as quite a surprise to Keynes.  It is impossible to imagine that Keynes would think deficit financing and monetary largesse would have much of an impact on economies with this kind of government overreach.

Yet, the Krugmans and Janet Yellens (and Ben Bernankes) of the world continue to trumpet this absurd message -- that a world drowning in debt needs more debt.  Having laws that make it illegal to hire anyone (minimum wage laws in the US) and punish businesses that do make hires (Obamacare, discrimination laws in the US, and labor laws generally in Europe) don't faze the Krugmans, Yellens and Bernankes.  They don't think these things matter.  They remain puzzled by the sluggish economies in the US and Europe.

They are going to remain surprised.

Keynes would not be surprised.  He understood that you can strangle an economy with an over-extended government.  Absurd debt levels would have seemed to Keynes -- as absurd.

The US and European economies are strangling from regulation and taxation.  The western economies will never return to their old vigor until their governments back off.  The problem is not macro, it is micro.

What is lost on the modern Keynesians is that someone has to decide to hire someone, before getting a job can become a reality?  Modern governments place every conceivable roadblock in the way of a firm attempting to make a hire.  So, businesses are reluctant to hire, even when they wish to expand.  They look for outsourcing or automation solutions.  The last thing any rational firm wishes to do in the modern western economies is add to staff.

Meanwhile, the White House, according to today's WSJournal, is dusting off it's push to increase the minimum wage from $ 7.50 to $ 9.00, threatening the elimination of millions of potential and actual jobs! 

Why not cut to the chase?  Why not raise the minimum wage to $ 100 per hour?  Then everyone could live well, according to modern macroeconomists like Krugman and Yellen.

Modern macroeconomics is a fairy tale, that could only be told in a world in which we no longer live.  Governments have done everything possible to suppress the incentives for ordinary business to hire.  .

But, sooner or later, as the private sector becomes less and less important, the economy grinds to a halt.  The old Soviet Union and the post-1949 Chinese economy are the modern examples of what happens when the government makes all of the decisions.

In the western world, slow growth will disintegrate to no growth and/or negative growth.

Incentives matter, even if Krugman, Yellen and Bernanke think that incentives don't matter.  Nancy Pelosi was correct when she perceived that if her staff was forced into Obamacare, it would make government service less attractive.  That was probably the only time in her political life that she recognized the role of incentives.

If tax and regulatory policies discourage hiring, you won't get hiring. Doing Q1, Q2, Q3, Qwhatever won't matter. Q's don't hire, firm's hire.  This is what the modern macroeconomists never quite get.

No comments: