The invisible hand 5

Obama’s chief economic adviser, Christina Romer, admits that the Keynesian economic policy she (among others) advised Obama and the Democrats to adopt and implement, which they did eagerly as it was the redistributionist policy they wanted, was wrong and has failed.

The Washington Post reports:

Christina Romer, chairman of President Obama’s Council of Economic Advisers, was giving what was billed as her “valedictory” before she returns to teach at Berkeley, and she used the swan song to establish four points, each more unnerving than the last:

She had no idea how bad the economic collapse would be.

She still doesn’t understand exactly why it was so bad.

The response to the collapse was inadequate.

And she doesn’t have much of an idea about how to fix things.

What she did have was a binder full of scary descriptions and warnings, offered with a perma-smile and singsong delivery: “Terrible recession. . . . Incredibly searing. . . . Dramatically below trend. . . . Suffering terribly. . . . Risk of making high unemployment permanent. . . . Economic nightmare.” …

At week’s end, Romer will leave the council chairmanship after what surely has been the most dismal tenure anybody in that post has had: a loss of nearly 4 million jobs in a year and a half. … She was the president’s top economist during a time when the administration consistently underestimated the depth of the economy’s troubles – miscalculations that have caused Americans to lose faith in the president and the Democrats.

Romer had predicted that Obama’s stimulus package would keep the unemployment rate at 8 percent or less; it is now 9.5 percent. … The economy lost 350,000 jobs in June and July. …

When she and her colleagues began work, she acknowledged, they did not realize “how quickly and strongly the financial crisis would affect the economy.” They “failed to anticipate just how violent the recession would be.”

Even now, Romer said, mystery persists. “To this day, economists don’t fully understand why firms cut production as much as they did or why they cut labor so much more than they normally would.” Her defense was that “almost all analysts were surprised by the violent reaction.”

That miscalculation, in turn, led to her miscalculation that the stimulus package would be enough to keep the unemployment rate from exceeding 8 percent. Without the policy, she had predicted, unemployment would soar to 9.5 percent. The plan passed, and unemployment went to 10 percent. …

The truth is that the Obama administration is pretty much out of options. … “What we would all love to find – the inexpensive magic bullet to our economic troubles – the truth is it almost surely doesn’t exist,” Romer admitted.

Okay, there is no magic bullet – but there is the invisible hand.

It’s also called the free market.

Free marketeers would lower taxes, remove the minimum wage and the multifarious bureaucratic burdens on employers, and above all forbid government interference in the market. That is to say, they would reverse the policy of high spending by the state which Romer advised, Obama and the Democrats wanted, and even President Bush was seduced into attempting.

Economically wise conservatives have been telling liberals for decades, Keynes was wrong, Hayek was right.

Will the Republicans remember that when they regain Congressional power in November?

Posted under Commentary, Economics, United States by Jillian Becker on Thursday, September 2, 2010

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This post has 5 comments.

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  • SoulStraw3

    To see that Republican positions, from Reagan to Bush, are the real reasons why US economy is doing so badly, compared to developed nations as a result of which US has literally become a 3rd World country, as evident by avg House prices in US being less than ALL developed nations, compare the High unemployment rates in US to Germany or Japan that have almost Full employment. After all Republicans and US (right-wing) Media claim that one of the reasons that people are going to Vote Republicans is the high unemployment in US, so lets look at some countries that have near FULL employment, by looking at what these countries are doing then we can know instantly whether what these countries are doing is what Republican ideas are about and thus know whether to Vote Republican or NOT.

    So Germany has near full employment at 7.5%, vs real unemployment in US at 20%, or Government reported unemployment in US at 9.5%, what is Germany doing different than US?

    1- Germany has universal nationalized (socialized) health care

    2- Germany has MUCH MORE generous unemployment benefits than in US

    3- Germany has MUCH higher taxes on someone making more than 250K than in US

    4- Germany has MUCH more extensive regulation and a FAR more unionized workforce than the US.

    5- German workers by law get 8 Weeks paid vacation per year, compared to a measly 1 or 2 weeks in US if that.

    6- Germany has Universal child care.

    etc. etc. Social services, ALL of which Social services Republicans and the right-wing Media in US call “Socialism..” and will lead to “Job Killing…”, proving beyond a shadow of doubt that Republicans are lunatics and enemy of American people, since again German economy is doing much better than the US, here:

    http://www.bbc.co.uk/news/business-11026441

    or as per real Unemployment rates in Germany being at 7.5%, EXACTLY because of the generous Social services that Germany has for its People which US does not.

    So the German results prove beyond a shadow of doubt that Republican ideals, that is LIES for the benefit of the very rich (aka Wall Street gang), and the right-wing Media that enables them, such as Talkradio, Fox news, Wall Street Journal, etc. are EXACTLY the “Job Killing ideas…” since all the above aspects of German economy, Republicans and the right-wing Media in US call “Socialism…” and will lead to “Job Killing…” which again as per the example of Germany the EXACT opposite is true.

    And the same aspects of German economy also exist in other major economies with very low Unemployment rates, such as Japan which has an effective Unemployment rate of about 5%, here:

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avcHSqld7png

    So how can anyone be Voting for Republicans or claim that people are going to Vote for Republicans given the FACT, again the FACT, that countries that have very Low Unemployment rates, have policies which Republicans in their lunacy call “Socialism..”! Are these Americans who are supposedly going to Vote Republican brain dead that they cannot see for themselves the above FACTS? I mean the FACT that Germany and Japan have MUCH LOWER Unemployment rates than US are FACTS. And that these countries have universal nationalized health care and many other Social services, which Republicans are totally opposed to, are ALL FACTS. So how can anyone claim people are going to Vote Republican because of high Unemployment rates in US given the FACT that Republican ideas and policies are EXACTLY the “Job Killing ideas…”?

    Hayek is an idiot.

    • Keithso

      Senor or Senora SoulStraw should really be renamed StrawBrains, and I am being an optimist. First of all, Hayek, far from being an idiot is one of the most respected economists of all time – by all sides of the political spectrum. StrawBrains does not seem to be aware of this, or what proper manners are.

      Next, StrawBrains claims Germany has a “full-employment” status with 7.5% unemployment. Apparently the Brainey one is totally unaware that this level of unemployment is astronomic compared to the past when is was as much as 80% lower! In addition, the comparison to the US is marvelous and completely misses a critical point – for years, literally years, unemployment has been far higher in Germany than in the US. Unemployment in Germany fell below the US for the first time in over twenty (20) years in late 2008. In essentially all years from 1980 when I looked at the figures, except for an odd year, Germany was ABOVE the US by quite a margin. Where did the brainey-one get such looney ideas? Or such figures: the US rate today is 9.7% not 20% silly person.

      Now why did all this happen? Well, it was the invisible hand whacking Germany for adding all the ridiculous “social”costs to the cost of labour, therefore raising the cost of it, and therefore……guess what – less of it is used. Classic Hayek – the price signal of labour said “USE LESS OF IT” and less was used.

      Several other howlers are made by StrawBrains: Germany is behind the US in the trade cycle. The move for the US above the unemployment rate is therefore explained by the US being at a different stage to Germany in that cycle and Germany will probably rise again above the US. Not to be forgotten is the very worrying trend in Germany on two fronts: that the trend of the unemployment rate has been inexorably up in Germany since the 60's, and the structure of it is terrible – the degree of long-term unemployment in Germany far exceeds the US.

      Again, why? Again – the damned interference of the political elite adding costs to labour – shutting out the newcomers to employment, while preserving the existing unemployed force – and the absurd rules about firing workers preventing firing, but also acting as a HUGE deterrent to hiring them. In the US with much less such nonesense, markets are far more flexible, so unemployment rates oscillate about a flat line – not growing – and the time unemployed is far less. Long-term unemployment = BIG social issues.

      Why the recent trend down in Germany – again the invisible hand? In response to the grotesque overvaluation of the Euro, markets chopped it. Result – a huge export boom in Germany. For the uninformed, Germany is the world's largest exporter, and about half of GNP comes from trade overseas. The Euro drop is a godsend. Note the rest of Euope is not doing so well as they are not export-oriented countries.

      Now to Japan. Japan's unemployment rate (UNR) is 5.5%. Not bad, but in Japan for thirty to forty years it was under 2%, and 5% is considered a depression. Japan's labour market grew out of the feudal approach to business pursued by the Zaibatsu, in which you were never laid off/fired etc. Thus, in Japan the level of 5% is a crisis and provides little or no information on the US. If however, the curtain is raised on the UNR in the second-level companies the rate is again ABOVE the US.

      Far from being the “lunatics and enemies of the people” the people who try to limit the additions to the cost of labour should be hailed as heroes not fruit-cakes. Yet we see StrawBrains eagerly making up numbers to justify a position totally untenable in either the factual or historical realms. Never let the facts get in the way of a good opinion. And those sweet socialists caring only about “the people” – give me a break. The only thing the leftist thugocracy is interested in is grabbing power and holding onto it for their own ends. Until I saw the light, I was one of them.

      And as one parting note, why not let the people have their incomes and let THEM choose how to spend it? They can choose whether they buy health care or fast cars – it is, after all their money. And now the question of the day: how in God's name can say 3,000 politicians, living in Washington et al, in incredibly privileged conditions, make the best decisions for 300 million other people living all over the US in many different styles. Beats the Hell out of me.

      Come on SS3, get with the program Read the Federalist Papers and the Constitution, assert your free will; try reading Hayek and make an effort to understand his guiding light that the price mechanism works. Otherwise you could always go the the fun-filled East German area and talk to the people about the “good old days” of socialism. Oh, Praise the Lord, I almost forgot – say hello to my old friends the Stasis. Such an understanding group of sweethearts.

  • Nod

    Back to Berkeley, back to the blackboard, back to the crucible of incompetency.

  • Keithso

    Keynes spent most of his life studying money and monetary policy. His work, when read, which is never by the fawning leftists, really comes to the same conclusion as Friedman! Get that you leftist bastards!

    In addition, he foresaw how markets could, in a collapse, freeze up. This would occur as the terror sweeping markets would push interest rates up to levels that cannot clear all markets, such as extremely high, or after a collapse has destroyed the demand for money and they drop but NEVER below zero. So at each end of the extrema markets conceivably may have a problem. Markets will adjust, but in these extremely rare situations the element of time comes in. The problem with the Keynesian approach is no one is willing to take the time in a crash to wait for the inevitable recovery as no one knows how long it will take.

    History suggests around three years, but in a stinker could be longer – and past an election cycle. But the CLEANSING of the detritus in an economy leaves it ready for a take-off – all stopped by the interference of the “caring politicians”. We thus have in the end an economy with mis-allocated resources, and corrupted by the risk-takers as they anticipate a bail-out. Such an economy is doomed to increase debt exponentially (as we have) until the point is reached where it can NEVER be repaid. At that point – KABOOM! either hyperinflation or a massive contraction following a debt implosion – which is where we are now.

    Today we have an ASSET PRICE collapse – NOT A KEYNESIAN demand collapse. Thus if demand expands, it cannot be financed as the credit to support it is not here – the banks have a hole blown in their balance sheets. So demand CANNOT expand = big nasty. If the Banks try to expand credit they hit the ratios that get them seized by the gov.! SO…… the gov tells them to lend and they cannot.

    The solution is obvious: the Banks have to be recapitalised. Romer saying she does not know this is incredible: Rogoff & his mate just published a book on asset price implosions describing around twenty such collapses and they cover precisely this subject, and after all is said show the doom follows a predictable path, BUT IT TAKES TIME – about 15 years. This is understandable as if you assume Banks can grow their balance sheets to cover the hole in them at 6% per year, if they lost 50% of their asset base (see real estate today) it would take 15 years to get back to square. See Japan – the poop blew up in 1989. The gov fought it – now 20 years later they still have deflation and appear to be entering another recession. They have “lost” a quarter of a century.

    The good news is the situation displays the utter incompetence of Obama and his leftist swine. Romer is shrewd: she knows the ship sinketh and the lifeboats are getting filled. Get out now with a reputation to be saved, not after the Titanic sinks.

  • Keithso

    Great stuff.

    To be accurate, Keynes was not wrong so much as misunderstood and misused by the toads of the left. His policies were to be directed towards increasing aggregate demand in a time when insufficient demand was the problem, and resources were available but unused.

    His concept was to utilize the opportunity of a slump to take care of outstanding useful projects at a time when they were cheap, and once the economy recovered, to pay off any loans/taxes with the surplus generated from the enhanced infrastructure and taxation base.

    That is not today. The present collapse is a credit-based deflation brought on by the pathetic policies of the left to let “no-one suffer”. Yet if you do not suffer you will ANTICIPATE the government bail-out and never learn. Thus, a credit collapse is what we have. Over and over in history, the same remedy is needed – let the markets work because they WILL work – either with you, or without you.

    Romer MUST know this. She is being a good liar and pretending she does not know what to do. The reality is: get the pain out fast since if you do not you will prolong the problem by continuously mis-allocating resources for an extended time. Hayek knew this and anticipated the political aspect of the situation. He always described himself as a Political Economist and constantly referred to the price system as a message mechanism. Cock-up the message and you cock-up the economy. Look to Japan to see what is in our future – is is not nice……………..

    Hayek was right and also RIGHT on.