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Euro-zone Keynesian Economic Dogmatism

Economics / Economic Theory May 31, 2013 - 06:50 PM GMT

By: Andy_Sutton

Economics


Lest I be accused of picking on US-centered media outlets, we’re going to spend a bit of time this week dissecting a Eurozone Reuters article which puts on full display the completely absurd rationale of the Keynesian economic model. This folks is truly the stinker of the year (so far) right here. Unfortunately, it also lays bare the dogmatic nature of economic thinking. It should be no surprise really; the same dogmatism exists in the political and religious arenas as well. Dogmatism was once explained to me as ‘clinging to a particular belief or beliefs in spite of overwhelming evidence to the contrary’. While this is not the ‘official’ Webster’s definition, it makes the most sense to the average person and is very fitting for this discussion.


I’m a ‘show me’ kind of guy. I should have been from Missouri I guess since it is the ‘show me’ state. Maybe that’s my problem. I’m going somewhere with this. Like most economists of varying stripes, I spent a good deal of time studying the subject at both the undergraduate and graduate levels. The school I went to employed what I would consider to be a very Keynesian leaning group of faculty. The biggest problem was they could never show me how Keynesianism worked or that it even worked at all. Actually, the harder they tried, the more I became convinced that Keynesianism in fact doesn’t work. Their theories in the classroom failed to match up with or even explain the observations made in the real world.

At the time, I incorrectly attributed the disconnect to the fact that these guys had been in the classroom too long. A few had never worked what most would consider a ‘real job’. And maybe that conclusion was true for some, but what it really comes down to is dogmatism. They are clinging to Keynesianism in spite of overwhelming evidence to the contrary. Now remember, I finished graduate school before the term ‘housing bubble’ had even been thought of. The government had, in fact, just borrowed a bunch of money to send out ‘stimulus checks’ to the population.

Still Clinging… 11 years later

One of the biggest areas of dogmatism in the field of economics is that inflation is necessary for economic growth. This is not really a bastion of economics as much as it is a talking point for global bankers who love to rip off the world by debasing its currency. Let’s get serious here; the folks making these decisions know full well what they’re doing.

So we get to the meat of the material for this week. Reuter’s EU journalists Robin Emmott and Ingrid Melander penned an article entitled ‘Record Unemployment, Low Inflation Underline Europe’s Pain’. What? Since when is low inflation associated with economic pain? Isn’t the whole goal to have zero inflation? That would mean that you have a balanced measure in terms of your currency. It is worth a year from now what it is worth today. Go too far in either direction away from zeroflation and you’re going to have problems.

“With the euro zone in its longest recession since its creation in 1999, consumer price inflation was far below the ECB's target of just below 2 percent, coming in at 1.4 percent in May, slightly above April's 1.2 percent rate.

 

That rise may quiet concerns about deflation, but the deepening unemployment crisis is a threat to the social fabric of the euro zone. Almost two-thirds of young Greeks are unable to find work, exemplifying southern Europe's 'lost generation'.”

 

The bit about the unemployment rate and the troubles in Greece are spot on. It is common sense that unemployed people are going to suffer and countries with high unemployment rates aren’t going to do well economically. Somehow we haven’t had reality Madison Avenue marketed out of existence – yet.

But what about inflation? The implication here is that inflation is necessary for economic growth when it clearly is not. And this is where the theory diverges from reality. The obvious thinking is that by solving the inflation problem, that will take care of the unemployment problem because after all, inflation causes growth. Please feel free to take a moment to recover from your doubled-over state. I know this is painful, but we have to do it. Conventional Keynesian logic would be for the government(s), vis a vis central banks, to create money by some vehicle or vehicles, which the governments would disburse and the banks would lend. This would create demand for goods and services and require businesses to hire workers. Problem solved, right? Wrong.

All you’ve done above is created a bunch of debt that needs to be paid off. And when there is too much debt, then you run into a persistent crisis state such as that which the Eurozone now finds itself mired.  The part about too much debt and the persistent crisis state is not theory – it is reality. We have an entire continent that is in very real danger of losing first world status – if it hasn’t already happened – because of too much debt. And yet we have the following:

“Some economists believe the ECB, which meets on June 6, will have to go beyond another interest rate cut and consider a U.S.-style money printing program to breathe life into the economy.

 

"We do not expect a strong recovery in the euro zone," said Nick Matthews, a senior economist at Nomura International in London. "It puts pressure on the ECB to deliver even more conventional and non conventional measures."

Again, we must have inflation (we now call it quantitative easing) in order to have economic growth. More debt fixes the problem of debt. Dogmatism in its purest form. There is now overwhelming evidence to the contrary that Keynesianism was and is nothing more than a short-term shuck and jive to paint the picture of growth where there was none. To create the illusion of recovery where there was nothing but stagnation, and to condition people to accept the debasement of their currency as a ‘cost of doing business’ in terms of having a sustainable economy.

Of course, in the Keynesian fantasyland, debt doesn’t matter and doesn’t need to be paid. Ever. Tell that to the poor slob who lost his house because he tried to adopt Keynesianism at a personal level and stopped paying his mortgage because some moron on television said debt doesn’t matter.

The facts are on the table and still governments, most economists, and policymakers cling to their Keynesianism like a child clings to their favorite teddy bear. It is comfortable. And their answer every time it fails? “Well, we obviously didn’t do enough” They never think that perhaps…just maybe… they did too much. And there’s more:

“European Council President Herman Van Rompuy, who chairs the meetings, said last week youth unemployment was one of the most pressing issues for the 27-nation European Union as a whole.

 

Ministers from France, Italy and Germany called this week for urgent action to tackle youth unemployment, with Schaeuble describing it as a "battle for Europe's unity" and warning of revolution if Europe's welfare model is abandoned.”

A revolution if the welfare model is abandoned? I didn’t say it; this is Germany’s finance minister saying this. His country is paying for a lot of this ‘welfare model’ and yet he’s got no problem with continuing it no matter how broken it is. This is more than just bad policy or dogmatism. This twisted, ersatz economics is going to cost in terms that reach far beyond monetary and economic in nature. It is already happening.

This is where I get down on the media. As a whole, it generally has no problem pumping its opinions down our collective throat along with the ‘news’. The media is exceedingly good at porcine cosmetology. A truly unbiased media would have presented this article with the quotes and comments included in the article, but would have also sought out balance in the form of economists and policymakers who don’t believe the printing press and more debt are the solution to the world’s problems. Of course this might educate people and they might realize that there in fact are other ways rather than beating their heads against the wall and repeating the same mistakes over and over again.

You would think this would be especially true in light of the recent and abject failures of Keynesian to produce anything more than additional misery for the world’s population. But in typical dogmatic style, perhaps with an agenda or two thrown in, it is business as usual for the mainstream opinion-shaping machine. History may give the media a free pass, but I will not. The blood of nations is on your hands as much as the actors who embarked on these policy boondoggles.

By Andy Sutton

http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

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