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The Economic World According To Stockman

Economics / Economic Theory Apr 08, 2013 - 01:26 PM GMT

By: Andrew_McKillop


In a review of main points from David Stockman's troublesome new book for peddlers of the mantra "We are all Keynesians now", in an economic world that Keynes wouldn't even be able to recognize, William Anderson listed the ways that "Neo Keynesians" not only hobble the fragile booms their basically schizophrenic policies produce, but also the fake recoveries that follow in their wake. In particular Anderson looks at Stockman's argument that when an economic boom crashes, the proper response of governments and monetary authorities should be to restore sound money and not try to prop up enterprises that failed in the crash.

Stockman's book took him a long time write, drawing on his experiences in and out of government and Wall Street over decades. It has caused a howl of protest, and personal attacks, from what we can call the "Neo Keynesian orthodoxy" which in fact applies a mix-and-mingle of anything that is bad from over 200 years of economic theories and policies. Paul Krugman has been specially vitriolic.

In Keynesian theory as written and defended by Keynes himself "depression" would not exist, immediately warning us about the hype-content in original from-the-horse's-mouth Keynesian theory. The list of possible causes is in fact endless. It could run from sunspots (or their absence), bad weather, wars and plagues to new technology, industrial overcapacity, resource depletion or ageing and declining populations. Economic pyschology of the mass variety must also be included.

Keynes in the 1920s was "obliged" to build his reputation, therefore obliged to be inconoclast, and attack previous Liberal orthodoxy, itself highly ambiguous and tortured. This orthodoxy of course in no way advised "hindering the economic process", but taking only the case of international-scale wars, these surely and certainly modify the economic process. Through the period of about 1870-1920 it is hard to list the number of relatively major wars that occurred. In the 1920s, the sequels of "the Great War", of 1914-18 were the basic cause of why Keynes was able to make his bid for stardom.

For example in wartime, liquidating arms manufacturers isn't on the table. After war, it is. If not Keynes himself (its debatable) then certainly the "Neo Keynesians" claim there is now a permanent wartime-style emergency. They do not explain why. No enterprise of any size and importance can be liquidated due to this emergency, bringing us to Stockman's and Anderson's first charge against the Neo Keynesians - - they "Prevent or delay liquidation" by lending money, or giving it to shaky businesses, including shaky banks. Today we have QE, the ultimate version of this, where governments and states themselves become "shaky businesses". What happens when they are liquidated?
Keynes himself produced acres of elegant fine-print, enabling him to deny and contradict anything specific he might otherwise have been able to be nailed down on. He was careful to not say "Inflate further" and left that to the politicians and central bankers applying his recipe book of New Ideas - decades after he had himself died. For Stockman and Anderson, the "bad medecine" of inflating further is designed to block or prevent a necessary fall in prices, in other words deflation.

As already noted, we have few or no non-economic theories of economic depressions, but plenty of historical and statistical evidence that non-economic causes (or "non-policy causes") exist in large numbers. Economists and politicians inevitably ignore or downplay these causes and focus on credit expansion, or contraction, and how this could theoretically delay or accelerate "economic adjustment" and either shorten or prolong depression. For the Neo Keynesians, however, there is only one pedal on the car floor - the accelerator pedal. Further credit expansion will not cause malinvestment, they say, but will cause inflation, which they want.

When "easy money" produces nothing but stagnation, however, it is logical to conclude that something went very wrong. One excellent real world example is playing out in Europe, especially in the "Club Med" countries. Wages and salaries are being slashed even by the "employer of last resort", the State, but this only further aggravates the crisis of mass unemployment. For the Neo Keynesians this is comforting, enabling them to divert attention from how they sabotaged the economy, in first place.

Possibly an original Keynesian notion, keeping prices up is surely part of the Neo Keynesian toolkit. This feeds straight back to their primal fear of deflation and rising interest rates, but falling wages. All of these depression-like threats can be magicked out of sight if prices can be propped up, they imagine, creating huge unsalable surpluses and accelerating the already fast pace of High Street shutdown.

Stockman and Anderson rightly criticize the gay and fragile Keynesian notion that - without limit -  consumption must be cranked up and savings must be laminated. To be sure, in the 1920s USA and Europe, or in low income developing countries today (not the Emerging middle-income economies) it was and is easily possible to raise consumption. Linking this directly to savings is already a major fault of Neo Keynesians, completely ignoring economic psychology and the desire for personal security. In fact shredding the notion of savings, of money, and forcing that basic instinct to operate in real estate, stocks, shares, even precious metals is likely the primal fault of Keynesians, whether "Neo" or not.

It is easy to argue the real reason why politicians gurgle "We are all Keynesians now". Keynesianism means Big Government, and that means Big Brother.

Here, we shift to the real meat of Stockman's book, called "a rant" by well-oiled and organized talkers in the "business press community". In the time and place of Keynes, 1920s Europe, governments were tiny relative to today. They could (arguably) grow a little, take on some new responsibilities, mainly social and community. Keynes of the 1920s, even in 1946 before he died, would be unable to recognize Big Government as we know it today. It would surpass his mental capacities.

Also, Keynes would be unable to understand how Big Government of today has ruined itself. Big Government of today is not a straw man, but a straw giant squatting on a ruined economy. Rather than being laughable, it is very dangerous and very frightening - which is likely one of the unstated reasons why Stockman's book has been so heavily panned, by so many "regime-friendly" reviewers.

Big Government gives yet more insights into the literally fantastic real levels of unemployment - we mean unemployability - in the former rich countries. Taking the civil servants out of their tax-funded ivory towers, would be fine, but what would we do with them? Industries of all kinds today have such huge output capacities they can (over)supply a world of 7.1 billion population, but only need small labour forces - for example the cellphone and car industries. We can ask where would or could the "reinvigorated USA" of David Stockman export the products of its New Industries?  Stockman does not look at subjects like this, except through his own lens.

One criticism of his book is that he rightly slays 30 years or more of Big Government-gone-lobo but he doesn't say how it could be righted. What he does say is mostly fine, but it should have been applied (when he was Reagan's Budget director!) some 30 years ago. This didnt happen, and Big Government only got bigger. For 30 years. Dismantling Big Government is like decommissioning nuclear reactors. It sounds and looks feasible on paper and before you start. When work starts, the costs mount straight up a wall, and the timelines stretch almost to infinity. To be sure, this helps explain Stockman's pessimism, but the subject of "What do we do about the economy?" is no longer the main question.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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