The single most disturbing component of our non-recovery throughout every first world economy is the stagnation of broad money. Its only real historical corollary is Arthur Burns and stagflation, but even then its a tenuous example. Talk to any professional economist and they all admit that the key to growth depends on driving higher loads of debt. You read that right. To a monetarist, something is badly wrong here and its found in acknowledging that contemporary trained econometricians ignore micro foundations. But like all positivists or Statists’ they are taught an ideology that stands at odds to reality.
What are Keynesians to do when countercyclical measures fail?
I have an idea, lets allow working people to get to equity, capital formation. Let’s honor what was known prior to Keynes, even before we had central banks. I’m not speaking of fixed exchange rates, I’m talking of the astonishing growth that occurred before the birth of the Fed and its corollary under Reagan.
Here’s a fascinating question that speaks to our divide. Does an increase in the deficit increase aggregate demand? If you said ‘no’ you’re in the camp of Hayek, von Mises and hosts of others. I’d note profound social, political, even geopolitical differences do underwrite policy regimes throughout the first world, even still the above noted question is perennial, for it speaks to the issue at hand, namely the relative informed relation Keynesian thought has on economic reality.
Much to the consternation of Keynes, Martin Wolf, Paul Krugman and his legions, the U.S. deficit has shrunk under our ‘recovery’. Nevertheless, the challenge embodied above in the interrogative still stands.
What the Keynesian cohorts recite is circular logic, but nonetheless exemplary of keen insight, namely that output growth remains weak because of stagnating labor productivity. Notice the slight of hand, this isn’t a resolution to the problem at hand, namely the formal relation that Keynesian thought says exists between fiscal policy and aggregate demand.
Let me put it another way: does an increase in the budget deficit increase output?
It should, but it hasn’t. Which brings me to how Krugman and his Keynesian cohorts remain casually wedded to evidence, even historically favorable evidence. Since 2008, none of it has worked. If anything, King Krugman et al remain divided over the size of the multipliers. We’re now in a position to admire the slight of hand more adroitly, for the truth that all positivist sciences’ possess is established by evidence evaluated as data, not by mere assertion.
To conclude: getting exchange rate policy is just as important as getting fiscal and monetary strategy right, however, in application of a policy mix, the politicos must acknowledge what’s held in the balance, namely volatile relations between taxation, expenditure balanced between interest rates and the money supply.
The clowns in D.C. are learning on the job.