The Bear's Lair: Bad Times breed bad ideas
June 9, 2014
Good times tend to be relatively infertile of new economic ideas. Even radical economists, grinding their teeth at the apparent success of the market, don't want to be accused of killing the golden-egg-laying goose.
Conversely, bad times—lengthy or especially deep recessions—bring out the madmen from the woodwork. And with them comes the danger that idiocies will be permanently legislated into the economic system, warping it forever. We are in such a period now.
Oddly enough, the first such madman produced by bad economic times was an economist whose work resonates 200 years later: Thomas Malthus. The gradually improving living standards of the eighteenth century had given way to crisis conditions by 1798, as the costs of the French Revolutionary War, the partial French blockade and a series of poor harvests had caused an outbreak of working-class hunger. Malthus' gloomy prediction of population pressures leading to mass starvation may yet prove prescient in the 21st century, after the huge population increase caused by the Industrial Revolution. But in 1798 it was at least 200 years premature and contradicted by the relatively comfortable condition of the British working classes in peacetime.
Fifty years later, during the Hungry Forties and the Irish potato famine, Karl Marx produced "The Communist Manifesto." Being a fanatic, he then went on to write "Das Kapital," published in 1867, during a period of unprecedented peace and prosperity caused by almost pure capitalism (the protectionism and modest social programs of later in the century had yet to kick in). Still, the "Communist Manifesto," which first exhibited his fallacious economic doctrine, was, like Malthus' work, the product of hard times.
Henry George's "Progress and Poverty," published in 1879 at the bottom of the next major economic downswing, was a plea for redistribution via land nationalization and paper money. It was typical of the intellectual products of an economic downturn, whose depredations appear to have rendered questionable the verities of the previous upswing.
The Great Depression was prolific of such follies. The foremost among them was Keynes' 1936 "General Theory" with its "euthanasia of the rentier" and assumption that a caste of intelligent bureaucrats could manage the economy much better than the chaotic free market. However, there were others: the Townsend Plan, offering unfunded pensions of $200 a month to the aged, and Upton Sinclair's "End Poverty in California" movement. You can add to the list Huey Long and Adolf Hitler. Both demagogues, with economic policies both statist and populist, they flourished in an era when conventional politics and economics had seemed discredited.
In the long 1970s malaise, the Club of Rome approached the subject in a new way, using computer projection to predict that the world economy could not possibly survive another 40 years. Its projections were fallacious, but its spirit lives on, not least in the attempt by global warmists to convince us that we must load the global economy with massive extra costs and inefficiencies in order to forestall a global warming a century hence that is at worst modest and manageable.
This time around we have a wannabe Karl Marx in Thomas Piketty's "Capital in the Twenty-First Century." His thesis that capitalism inexorably produces surging inequality is weakened both by his insouciant attitude to spreadsheet construction and by his complete failure to acknowledge the role of two decades of over-stimulative monetary policy. When leverage is both very easy to obtain and available at real costs close to or below zero, the nouveaux riches, with preferential access to leverage and few scruples on how they use it, are hugely advantaged. Such a period also rewards entrepreneurs like Mark Zuckerberg—mildly unscrupulous, quite inventive and very, very lucky. In a normal period their innovation might well have succeeded, but it would not have made them anything like so rich so quickly.
Piketty is not however alone. Far more important than his fantasies are the excesses of monetary policy that have held sway for more than five years (and in lesser form, for 20 years next February.) Keynes' enthusiasm for euthanasia of the rentier is back, albeit in far more virulent form than he ever imagined was possible back in the 1930s. In the U.S., real interest rates have been substantially negative since 2008, and show no sign of returning to positive territory. In Britain, they are more negative, while in Japan, every effort is being made to push them further into negative territory. Even in the EU, supposedly the hotbed of monetary orthodoxy because of residual German Bundesbank-trained influence, rates are below the admittedly subdued level of inflation, and have now been pushed into negative territory.
Keynes' proposal to euthanize the rentier was always fueled by his Bloomsbury-leftist class hostility for the Tory squires, small family businessmen and maiden ladies who at that date formed such a valuable backbone to British society. Their euthanasia was eventually carried out by the oppressive taxation, continued inflation and financial repression of World War II and the three decades that followed. But its social effect was always likely to be even more noticeable than its financial one.
For those who like the relentless proletarianization of British culture that has followed, with Estuary accents succeeding BBC English, public drunkenness abounding and the replacement of Sloane Rangers with Footballers' Wives, the social benefits of rentier euthanasia may partly balance the economic damage that caused Britain to slip so far down the world's league tables by 1980. For the rest of us, the one only compounds the other. Euthanasia of the U.S. rentiers in the past six years is having the same effects, both financial and social, as the country becomes a nation of impoverished twerkers, with no global war having been necessary to achieve it.
The other bad idea of the last half-decade in the monetary sphere has been the refusal to recognize the asset bubbles that funny money is producing. This goes back further than 2008. Then Federal Reserve Chairman Alan Greenspan's refusal to address the late 1990s tech-stock bubble in 1997, after having recognized it accurately if somewhat belatedly in December 1996, was the first such instance, while both Greenspan and his successor Ben Bernanke's stubborn refusal to recognize the housing bubble in 2002-07 is now notorious. At this point, asset prices in all classes are showing signs of bubble status, and the coming liquidation of all this malinvestment will be correspondingly severe.
Finally, the idea appears to have taken hold that monetary stimulus can be increased ad infinitum, without producing inflation, that $2.7 trillion of excess reserves sitting on U.S. bank balance sheets will have no long-term dire consequences. To be fair, I am very surprised that those dire consequences have not taken place, and recognize that if they don't, the theoretical basis of Friedmanite monetarism (though not of von Mises' malinvestment theory) may need re-writing. Still, my money remains on a delayed disaster rather than a massive re-writing of economic first principles proving necessary.
Limits on fiscal policy previously thought appropriate have been abandoned in this downturn, with trillion dollar deficits appearing in the United States and even larger deficits as a percentage of GDP appearing in other countries. Even after some mild attempts at austerity, deficits and public spending remain substantially above historic levels, constraining public finances going forward. Of course, the first attempt at Keynesian deficit financing on this scale was made by Japan after 1998. There it hasn't worked and public debt is approaching crisis levels. Like our monetary errors, our fiscal errors seem bound to return and haunt us within the next few years.
Finally, in case the world wasn't getting depressed enough about its economic condition and angst-ridden enough about its monetary and fiscal overhang, Robert Gordon of the University of Chicago has propounded the theory that technological advances are slowing, so that productivity and income gains in the 21st Century will be less than half those of previous centuries, slowing altogether to a halt by 2100. This is of course a revival of the "secular stagnation" theories of the 1930s and even of Malthus's view that food production could not increase fast enough to keep up with population. Nevertheless, at some point one of these doom warnings will be true; there just seems little reason why that should occur at this particular time.
The danger of these eruptions of bad economics is that enough of them will be believable by populist political policymakers for them to institute policies that make the sluggish economy worse. At that point a vicious cycle will ensue, with more sluggishness producing even worse economic ideas, which the politicians then proceed to enact. Should this occur, Americans will be glad of the hysteresis built into the political system by the Founding Fathers, ensuring that bad economic ideas get enacted only slowly if at all. Britons and Europeans however have no such protections, nor does Japan.
As T.S. Eliot wrote: "This is the way the world ends. Not with a bang but a whimper." Or in this case, with a drizzle of bad economic ideas that become built into the economic system, producing further prolongation of malaise that generates further bad economic ideas. In a recession of this length, an intellectual Gresham's Law operates, and bad economic ideas drive out good, and proliferate. We should resist them with all our might.
Posted by: "Sunny" <ambon@tele2.se>
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