Wednesday, October 22, 2008

Nasty, brutish - and as stupid as a political journalist [update 3]

JohnBoyJunior Whatever qualifications the Herald's John Armstrong has either as a journalist, or as a student of politics, he knows less than zero about economics -- and since he's paid to write about it (or since he's taken on the task unquestioned) -- he should learn a few basics, particularly before he starts peddling advice on the front page of the country's largest daily.

"Never mind inflation," says the numb nut right across this morning's front page, "recession needs big promises." And by "big promises" he really does mean a multi-billion dollar "spending splurge."  "infrastructure spending," says the ignoramus, "is ... the responsible thing  to do right now."

Sheesh, where on earth do you start with something as dumb as that, when all your reason tells you to respond by running screaming into the street yelling "No it fucking isn't, dumbarse!" ?

Do you point to Arnstrong's abject failure (along with most of his colleagues, unfortunately) to understand inflation?

Or do you start with the frankly destructive New York Times article by "Nobel-Prize winning economist" Paul Krugman that Armstrong points to and on which he relies, which maintains (correctly) that "All signs point to an economic slump that will be nasty, brutish — and long," and then demands as a solution that "increased government spending is just what the doctor ordered." 

Now, a prescription like this is sure to get the attention of big-spending interventionist governments and their supporters everywhere -- and of course it has ever since Krugman's hero John Maynard Keynes first opened his mouth with it seventy years ago -- and it has here too:  Helen Clark is now talking it up, and feeling her big-spending interventionist muscles. And John Key, too, is getting set to fill the same neo-Keynesian prescription that will attempt to cure the disease by giving us more of what caused it.

It's a National-Labour coalition, folks, both taking their cure from the same doctor.  Pity that the doctor is a quack whose prescription amounts to blood-letting as a cure for haemophilia.

You want to see nasty, brutish and long?  Then just look at what Krugman's neo-Keynesian prescription did in the thirties, as described by Dominic Lawson in last week's UK Independent:

    John Maynard Keynes, rather than Ludwig von Mises, is the economist whose name is currently being invoked on the airwaves in Britain. in his own day, too, Keynes obliterated Mises: it became fashionable to believe that Roosevelt's New Deal was a kind of successful rudimentary application of Keynesianism.
    Yet Roosevelt's policy of massive intervention by the state to prop up wage rates and inflate credit gets a much better press than it ever deserved. Consider this: in September 1931 the US unemployment rate was 17.4 per cent and the Dow Jones industrial Average stood at 140. By January 1938, unemployment was still at 17.4 per cent, and the Dow Average had dropped to 121...

So, no support there for Krugman's snake oil, unless your eyes can't see past the words "massive intervention" without heading off into excited hallucinations of Michael Cullen or Bill English wielding an open cheque book .

We've been over this before when the doctor quack got his prize.  Getting a Nobel for work on "analysis of trade patterns and location of economic activity," doesn't mean you know jack shit about what to do in times of recession. And he doesn't.

I won't repeat at too great a length what I said the other day, quoting Ludwig von Mises, about this phoney failed prescription for recovery

  • -- that interventionists would be right if their antidepression plans were to aim at a radical abandonment of credit expansion policies
  • -- that the problem is not to elaborate infrastructure projects, but to provide the material means for their execution
  • -- that the fundamental error of these projects consists in the fact that they ignore the shortage of capital goods 
  • -- that while the only real problem is to produce more and to consume less in order to increase the stock of capital goods available, the interventionists want to increase (somehow) both consumption and investment
  • -- that  the interventionists want the government to embark upon projects which are unprofitable precisely because they are unprofitable
  • -- that the factors of production needed for their execution must be withdrawn from other lines of profitable employment that consumers consider more urgent, and the production of which would otherwise provide the means of formenting a genuine recovery
  • -- and that the interventionists don't realise that such public works must considerably intensify the real evil, the shortage of capital goods, while destroying the very basis on which this shortage is to be remedied.

Okay, I will repeat myself (and Mises) just a little, but in the face of such destructive crap as is peddled on the front pages of our newspapers this really needs to be pointed out repeatedly: if you take away the capital resources that producers need in order to recover (which is what deficit spending does); and if by extra spending you continue to inflate costs, when it is the very correction of lower costs that is needed in order for producers to recover, then you are destroying the very means by which recovery is going to happen.  Understand, no?

You see, unlike Krugman's hero Keynes, whom history should record as the theorist who managed to extend the Great Depression of the thirties for more than a decade, Mises really did know what he was talking about.  As Lawson outlines,

   In his 1912 work, The Theory of Money and Credit, Mises declared that the corruption and distortion of money by the state and bankers ... was the principal cause both of inflation and – to coin a phrase – boom and bust...
    As the chief economic advisor to the Austrian government in the 1920s, Mises put his theories into practice and slowed down inflation in his native country (which, as a Jew, he later fled). He used his "cycle" theory to forecast that the "New Era" of apparently permanent prosperity in the 1920s was illusory, and that it would end in runs on banks and depression: The Wall Street crash of 1929 was exactly what Mises had predicted.

And today's Misesians predicted the present crash as well -- as you can see by checking the 'Who Predicted This?' section of the Mises Institute's Bailout Reader.

I won't labour the point that Krugman didn't get his Nobel for his grasp of what to do in a recession, but do you notice in the bullet-pointed summary above the repeated references to capital goods, part of an economy's capital structure?  What Krugman is fundamentally ignorant of, as Robert Murphy so carefully explains here, is capital theory -- of the existence and make-up of the economy's capital structure, which in the final analysis is what an economy really is,and which has been all but destroyed by the commodities bubble, the housing bubble and by the whole misallocation of resources brought about by the huge inflation of the money supply in recent years -- and which would be all but destroyed by the capital consumption implicit in Krugman's shiny short-term bottles of snake oil.

That, the economy's capital structure, is what fundamentally needs to be fixed -- but Krugman and Clark and Key and co don't even know it exists!

SushiChopsticks To be one up on all of them, and I promise you it won't take long, take a look at Murphy's entertainingly simple model of what a capital structure looks like, and how easy it is to screw it up, using a "hypothetical island economy composed of 100 people, where the only consumption good is rolls of sushi."

See how easily a man of Krugman's talents can screw up even a functioning capital structure (which is after all what the central bankers did with all that counterfeit capital they were creating at such volumes), let alone what they'll do to the economy now it's on life  support, and they want to take away the very oxygen it needs to survive.

Remember: nasty, brutish and long will be the result of following Krugman's exhortations to the interventionists to spend more.  But they'll still insist on you taking their medicine.  Why?  The answer's obvious: Have you ever seen a politician turn away an argument that says they can spend more?  Never happened. 

But it's the job of political journalists to know enough to tell them when they're wrong.  Sadly however, most of them -- like Armstrong -- don't appear even to know enough to tie their own shoes.

Like him they're mostly just bone from the neck up.

UPDATE  1:  Fortunately, one party at least understands that politicians spending money we don't have is not the answer, and nor is impeding the very people whom we need to be more productive.  I speak of course of Libertarianz two-part economic plan: their Don't-Spend-So-Goddamned-Much Plan  and their Get-The-Hell-Out-Of-The-Way Plan

Looks like on the evidence of his last paragraph here-- if not his earlier pledge to keep growing the state, -- Roger Douglas, at least, has been listening.  There's hope for him yet.

UPDATE 2: Austrian economist and senior lecturer at the Mises University Robert Murphy is interviewed on the boom, the bust -- and Krugman and Tyler Cowen and even "rational expectations" theorists -- and why Mises' Austrian Business Cycle Theory explained and predicted the bust, and the others didn't.  Listen here.  Good topical stuff.

UPDATE 3: Dumbarse.  After all that, I didn't even give you the link to Robert Murphy's superb article on the 'sushi economy.'  It's here.  And it's worth it.

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11 Comments:

Blogger Adolf Fiinkensein said...

Perhaps the real numb nut is the spluttering reader who is so beside himself with pretentious outrage that he failed to realise Mr Armstrong was reflecting Labour's political attitude to the current crisis?

10/22/2008 03:32:00 pm  
Blogger PC said...

Or perhaps the the real numb nut comments-person who failed to read John Boy Junior's concluding paragraph:

"Infrastructure spending, is therefore the responsible thing to do right now."

Or who failed to realise that National's political attitude to the current crisis is ... the same in all essential respects.

10/22/2008 03:39:00 pm  
Blogger PC said...

Adolf, you really need to realise that on this one Roger Douglas is right: "Major Party economic policies risk recession."

10/22/2008 03:40:00 pm  
Blogger Ruth said...

Armstrong is no better than your average blogger -the well thought of Fran O'Sullivan is far more dangerous.

She has just about single-handedly put the fear of god into everyone about banks 'running out of money' by Xmas.

Her solution - transfer the entire Aust banking system risk to the NZ taxpayer. A solution which has been eagerly seized upon by politicians of all stripes and is a power grab of unprecedented proportions.

What's more because the issues are complex she says it is URGENT we pass this legislation.

When this extension of the deposit guarantee scheme goes through infrastructure spending will be the least of our worries.

10/22/2008 04:07:00 pm  
Blogger PC said...

"Armstrong is no better than your average blogger..."

This is true,unfortunately, but since he gets paid big money to dribble his economic advice over the front page of the country's largest daily, you'd think he'd learn something about the subject first.

And for once we're in agreement.

I read that from O'Sullivan and thought I must have misread, it was so bad. I still intend to re-read it and respond.

That was not her finest hour -- that's for sure.

But at present they're all running around like chooks with their heads cut off, and even the best of them (a very small list, sadly) are still in thrall to the Keynesian crap they learned at university.

10/22/2008 04:23:00 pm  
Blogger Dinther said...

Now you've done it. I decided already I was going to get my hands on "Economics in one easy lesson"

First stop was the library. Response from the librarian: "Ha ha ha economics in one lesson, if it only was that easy" They didn't have it of course.

Second stop not that I expected much but I was passing anyway. Whitcoulls. The lady had trouble spelling economics and no there was nothing. Plenty of "womans weekly" around though. Sigh.

I'll order it online as suggested.

10/22/2008 04:56:00 pm  
Anonymous the drunken watchman said...

PC,

where is the link to Murphy's bit about the sushi-eating islanders?

... any allegory featuring sushi and Waikato beer I'm surely more likely to understand

10/22/2008 08:33:00 pm  
Blogger PC said...

DW: Oops. Fixed now.

Here 'tis.

10/22/2008 11:34:00 pm  
Anonymous LGM said...

Auckland Central Library has a copy of "Economics in One Lesson."

LGM

10/23/2008 06:57:00 am  
Blogger PC said...

And it's not only for sale online, you can read it online too in both PDF and in HTML.

10/23/2008 08:50:00 am  
Anonymous Falafulu Fisi said...

drunken watchman said...
...about the sushi-eating islanders?

Wrong drunken watchman, Murphy was talking about lamb-flaps/corned-beef/brisket eating islanders.

I will cook you some (including boiled taro in coconut cream), this coming Christmas holiday.

10/23/2008 11:49:00 am  

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