Posts Tagged ‘Keynesian economics’
A nation of wimps

Stress a source of strength:

A Nation of Wimps: Parents are going to ludicrous lengths to take the bumps out of life for their children. However, parental hyperconcern has the net effect of making kids more fragile; that may be why they’re breaking down in record numbers.

Nassim Taleb’s antifragility strikes again:

Fragile things break under stress. But, according to Nassim Nicholas Taleb, there’s an entire class of other things that don’t simply resist stress but actually grow, strengthen, or otherwise gain from unforeseen and otherwise unwelcome stimuli. Taleb sees degrees of antifragility everywhere, from fasting, mythology, and urban planning to economic, technological, cultural, and biological systems.

A 20 min Nassim Nicholas Taleb youtube discussion is worth listening to here

Antifragility highlights yet again how we tend to create that which we most fear. In trying to protect our children from harm now, we cause them harm later. Preventing short term harm can cause long term problems. Unfortunately short run gains are often readily apparent, while the long term harm is hidden. Keynesian economics is the classic example, as is the welfare state.

The purported goal of the welfare state, to help people, is noble. But once a society creates a welfare state its people have different expectations about their possible futures. They therefore make different choices and their behavior changes. This changes people, and the society which they in aggregate form. Over time it changes the values their children grow up with. People and society fundamentally diverge from what would have eventuated absent the welfare state. At the individual level this is epitomized by the saying:

Watch your thoughts; they become words.
Watch your words; they become actions.
Watch your actions; they become habit.
Watch your habits; they become character.
Watch your character; it becomes your destiny

Thus a strong sovereign people and vigorous society can be transformed into something far weaker and more fragile. Truly the road to hell is paved with good intentions.

 
On the mend?

It’s not just Obama’s legacy being created now. It’s that of the whole Keynesian economic edifice. We’ve always said the bailout’s not only would not work, but could not work. Sure it can kick the can down the road, postponing the inevitable adjustment at the cost of making it worse. But real consumption can only be paid for through real production. It’s production that creates wealth to enable consumption and investment. The only way to sustainably boost the economy is create an environment favorable to production.

Governments giving more money to poor people will provide a sugar hit, but at the cost of distorting price signals. This in turn results in inappropriate investment decisions. Ultimately it undermines the economy. Sure there may be isolated incidents of successful engorgement investment. Of government guided economic development. Singapore comes to mind.  But not all countries will be blessed with a Lee Kuan Yew rather than a Kim Jong-il. Even Singapore may not always be guided by enlightened hands.

History is more akin to a marathon than a sprint. Blair’s “Cool Britannia” burst of government led growth will leave a long and toxic legacy. Many will rue the day they elected a Labour administration. That’s if the politically correct media are not able to assign blame elsewhere. But back to Obama. How’s the United States performing:

Only 54% Of Young Adults In America Have A Job:   Young adults (18-24) in the US, the employment rate is just barely above half, or 54%, which just happens to be the lowest in 64 years, and 7% worse than when Obama took office promising a whole lot of change 3 years ago… of all age groups, this is the one that has actually seen its wages drop the most under the Obama administration.

It’s OK. They are just kids. Hungry kids:

Growing Number Of Americans Can’t Afford Food, Study Finds: About 18.6 percent of people — almost one out of every five — told Gallup pollsters that they couldn’t always afford to feed everyone in their family in 2011.

The evidence is clear. Bailouts might enrich vested interests, but it is not good for society more widely:

America has lost almost a decade of progress to the financial crisis: Just six of the 34 “advanced” economies categorised by the IMF have GDP per person higher in 2011 than in 2007. Notable among them are Germany and Australia.

Rank injustice, with people going backwards and the youth largely unemployed. That will do wonderful things for social stability.

 
Good-Bye to All That

In good times inefficient systems can survive. Buffet’s comment that “only when the tide goes out do you discover who’s been swimming naked”  applies to “countries” as well as companies. While the debt tide may not have actually turned, it is in the process of turning.

The law of diminishing returns applies to debt as much as it does to other things that can increase GDP. Diminishing returns to debt have well and truly set in across the Western world. If it is not already, its impact on GDP will soon be negative. The instant markets recognized this the new paradigm will be born.  A new normal will then begin its reign.

Time is running out for the Western welfare state. We will soon see who is swimming naked. Our apparent fair and progressive system is about to be revealed as but one more path to perdition.  A slower less direct path than some, but the destination no less certain. Assorted schools of economics will be consigned to the dustbin of history as their vacuous ideology is revealed for what it is. Alas they will rise again in perverted form, when we have forgotten our past and times again appear to suit them.

At this unraveling of the Keynesian concept it seems apt to cite a Keynesian:

“To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.”

John Kenneth Galbraith, The Great Crash of 1929

It is also apt that Galbraith was wrong in this as in so much else. Embezzlement is not alone among the various forms of larceny in having a time parameter. The Western welfare state also has a time parameter. It is simply the public mirror of private sector embezzlement. As with so many government failures when compared to their private sector equivalent, its effect will be worse. It is likely to be maintained for longer, be more pervasive and have far worse consequences. Our welfare state may have made us feel wealthier than we were for years or decades, but it can not change reality.

The reality is that embezzlement lies at the heart of our welfare state. Welfare recipients are paid with taxes from workers on the promise that those workers will be similarly treated in their time of need. With fewer workers and ever more welfare recipients there is only one way it can end, absent prodigious productivity increases. Alas crony capitalism is not associated with rapid rises in productivity. Neither is socialism or traditional and tribal socioeconomic structures.

We need capitalist incentives to maintain any semblance of our expected way of life. Advocate for it now. All it takes for evil to triumph is for the good to remain silent.