Friday, 4 November 2022

Shamubeel Eaqub is an idiot

HERE'S MY ADVICE: DON'T take your recession advice from so-called economist Shamubeel Eaqub, who says this morning in preparation for his "thinking" that "household consumption, at two-thirds of the economy, is a big component.... People think [for example] household consumption is only down 1%, no big deal," he says, "but when it’s two-thirds of the economy, it’s important.”

Yes, household consumption is important. But household consumption is not two-thirds of the economy -- and only an idiot or a poorly-trained economist would say so. Household spending is, at best, only around 30% of the economy. Fully two-thirds of all economic spending is not by households, as idiots like Eaqub seem to think, but business-to-business spending -- which is more than double what households spend on themselves, and is what is really keeping all the wheels spinning. And if household consumption spending is down by 1%, by his example, then if that were to mean they were saving that 1% for a rainy day, then that saved money is actually being spent by the part of the economy that really is two-thirds of the economy.

Yes, it's conventional wisdom that consumption spending drives the economy.

Yes, you will hear it from newsmen and alleged economists.

Yes, you can read it almost everywhere.

Such a pity then that it's dead wrong. Insanely and destructively wrong.

YOU SEE, THE FACT IS that consumers don't drive more than two-thirds of the economy at all. This is just horse shit on a stick.Yes, that's what it looks like if all you read are GDP statistics. But the GDP statistics don't measure all the spending that happens in an economy. Specifically, they don't measure that vast bulk of business-to-business spending -- i..e., the productive spending that constitutes the majority of spending and income payments in the economy. In other words, for the stuff that really makes the economy go round.

If you do want to measure that, and you should if you want to keep an eye on how businesses are going, then it's not GDP you need to look at (too much of which is only an incentive for governments to try juicing up this figure ) then you need to look at a measure called Gross Output which, sadly, neither our Treasury nor our Stats Department bothers to do. 

U.S. business-to-business spending compared to consumer spending, 2005-22.

Nonetheless, as economist George Reisman explains it, this productive expenditure constitutes "all the expenditures made by business firms in buying capital goods of all descriptions and in paying wages,"
Capital goods include machinery, materials, components, supplies, lighting, heating, and advertising. In contrast to productive expenditure, consumption expenditure is expenditure not for the purpose of making subsequent sales, but for any other purpose. In the terminology of contemporary economics, consumption expenditure is described as final expenditure. Productive expenditure could be termed intermediate expenditure. Implicitly or explicitly, productive expenditure is always made for the purpose of earning sales revenues greater than itself, i.e., is made for the purpose of earning a profit.
And this figure is huge! It is, he explains, 
an amount equal to the sum of all costs of goods sold in the economic system plus all of the expensed productive expenditures in the economic system. It is these costs which must be added to GDP to bring it up to a measure of the actual aggregate amount of spending for goods and services in the economic system... And because productive expenditure is the main form of spending, most spending in the economic system depends on saving. Even consumption expenditure depends on saving, inasmuch as saving is the basis of the payment of the wages out of which most consumption takes place.
Which means that it's not consumer spending that drives the economy at all: it's savings.

Just contemplate that for a moment. 

SO HOW CAN SUCH an enormous figure be hidden in the arithmetic? Well, I blame Keynes. Essentially that GDP figure is his; when the GDP (or National Income figure) is totted up it counts profits, but it ignores completely the costs required to make those profits, i.e., it completely ignores productive expenditure, which by any rational measure is the spending that drives everything. In Reisman's words, that means that "Keynesian macroeconomics is literally playing with half a deck.
It purports to be a study of the economic system as a whole, yet in ignoring productive expenditure it totally ignores most of the actual spending that takes place in the production of goods and services. It is an economics almost exclusively of consumer spending, not an economics of total spending in the production of goods and services.
And since its the production of goods and services that do make the economy go round, and pay most of our wages and salaries, it's probably not a bad idea to keep an eye on how they're paid for. 

How are they paid for, you ask? As it happens, they're paid for by those very savings economists like Eaqub don't favour.

TOO OFTEN, YOU'LL HEAR SOME of these alleged economists, like Eaqub, or politicians, especially Ministers of Finance, whining about something they call 'the paradox of thrift' -- they'll say that in times of recession people need to spend, spend, spend and if they don't -- if they save instead (the horror!) -- then everything will collapse in a heap. But this is just dumb. Saving doesn't mean "not spending." It simply means deciding to spend later, rather than spending it all now. And in the meantime, if that saved money goes into a bank instead of a hole in the ground, the money that people save goes into investment, which means it goes to producers (or would do if it weren't diluted by printing money to produce stimulus packages).

It's those stimulus responses, and the idiots' urge to keep spending, that at this stage of the business cycle are the most destructive.

And to ignore idiots like Eaqub who keep their eyes averted.

And being an economics almost exclusively of consumer spending it sees "stimuli" only in consumer terms.

But once you realise where most of the deck of cards resides -- i.e., in productive spending -- you really do see what you're doing with consumer stimulus packages: you're taking real resources away from the behemoth that really does drive the economy, which is productive expenditure, and you're pissing it up against a wall.

That might be popular, but in the long run it's just flat-out dumb.


  • Bastiat: 'What is Seen and Not Seen.'  
    "There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."
  • Bastiat: 'What is Money'  
    "I cry out against money, just because everybody confounds it, as you did just now, with riches, and that this confusion is the cause of errors and calamities without number.
  • Rand: 'Egalitarianism & Inflation'  
    "If I told you that the precondition of inflation is psycho-epistemological—that inflation is hidden under the perceptual illusions created by broken conceptual links—you would not understand me. That is what I propose to explain and to prove."  And she does!

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