This page has been archived and commenting is disabled.
The Economics of Mass Destruction - Part II (Final)
From The Daily Capitalist
This is the final part of two parts of "The Economics of Mass Destruction." For Part I, go here.
The Fallout of Economic Conformity
The logical conclusion of these failed policies is economic stagnation. Here is what massive government spending and taxation has done to our economy:
- Total government (federal, state, and local) share of the economy has exceeded the tipping point, estimated to be between 15% and 20%, which is the point when it hinders economic growth. Presently total government spending for 2010 is estimated to be about 47% of the economy.
- Taxation must rise substantially in order to pay for government debt, health and welfare entitlements, and other fixed government costs. The 2010 estimate of federal, state, and local taxes amount to about 30.4% of GDP (about $4.480 trillion).
- Our total government debt (federal, state, and local) is estimated to be $16.635 trillion for 2010, approximately at 114% of our GDP (2010 E$14.623 trillion). Of total government debt, federal debt is estimated to be $13.787 trillion in 2010.
f=federal govt.; s=state govt.; l=local govt.
The larger the share of governments’ take of capital out the economy, the less money there is available for businesses and consumers. The less capital available for the private economy, the less it will expand, and the result will be a decline in GDP.
While progressive utopians believe that taxation of the “rich” is acceptable to fund social benefits, mathematics, demographics, and the laws of economics prove them wrong. Progressives have yet to understand that government produces nothing.
The table, below, shows tax rates of many major economies as a share of their GDP. The welfare states have taxes approaching 50% of their economies, with the median in the high 30th percentile. The U.S.’s tax burden on the economy of 30.4% is less than most of these countries. While we ramp up our welfare state which assures higher taxes, Europe’s welfare state services are crumbling and face drastic shortfalls as their GDP falls, as their populations age, and as their companies find better conditions abroad.
The Economics of Mass Destruction
The Organisation For Economic Co-Operation And Development (OECD) is an economic think tank put together by 33 countries of which the U.S. is a member (see above chart for members). Most members are economic powers. China and India are not members. It generates a lot of data, but very little useful research. It is located in Paris and has 2,500 international staff members. They take a rather hard Keynesian line. One need only look at their logo to see where they stand:
The OECD just came out with their Interim Economic Assessment, “Recovery slowing amid increased uncertainty” said the headline. They, like the Obama Administration are realizing that their Keynesian policies are failing.
The world economic recovery may be slowing faster than previously anticipated, according the OECD’s latest Interim Economic Assessment. Growth in the Group of Seven countries is expected to be around 1½ per cent on an annualized basis in the second half of 2010 compared with the previous estimate of around 2½ per cent in the OECD’s May Economic Outlook.
The OECD says the loss of momentum in the recovery is temporary although uncertainty has increased. …
If the slowdown reflects longer-lasting forces bearing down on activity, additional monetary stimulus might be warranted in the form of quantitative easing and commitment to close-to-zero policy interest rates for a long period," the OECD said. "Where public finances permit, planned fiscal consolidation could be delayed. [my emphasis]
It is clear that the OECD does not understand what is happening. Otherwise they wouldn’t need to suggest more fiscal and monetary stimulus if they really believed the “loss of momentum in the recovery” was only “temporary.”
Its announcement sounds almost as if the Fed had written it. Here’s what Chairman Bernanke said on August 27, 2010:
Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year. …
We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.
The Obama Administration is proposing more government fiscal stimulus spending to boost the economy.
The only thing these policies have achieved is the destruction of capital.
The Fed and other central banks have been printing money to pump liquidity into their economies. These policies aren’t working. Credit is declining, money supply is declining, and the creation of fiat money is destroying capital by devaluing currencies.
Massive government spending on politically favored projects adds nothing to the economy and destroys more capital. One need only look at U.S. stimulus spending at Recovery.gov to see where the billions are going. If it worked the economy would be growing and unemployment would be declining. The opposite is happening.
How does repairing a highway in Ohio lead to economic growth? The answer is that it won’t; once the money is spent, the repair jobs go away and the capital is gone.
Is it possible that the private economy would find better things to do with that capital? We need to ask what the person whose capital was taxed away by the government was going to do with it. I am sure that the answer would be that it would be preserved or used for new economically viable businesses. Only savings, not spending, creates capital for renewed growth by private enterprise.
Eventually governments run out of capital if they dominate their economies long enough. High taxes and a welfare state lead to lower incentives to produce and lower incentives to save. Most of these countries are still spending the capital earned in former, freer market economic times. If they destroy enough capital they will go bankrupt and plunge their economies into serious depressions.
The outcomes of policies that destroy capital will vary from country to country, but none of them will be good. In the U.S. we can look forward to stagflation: years of high unemployment, low productivity, and rising inflation. Japan will continue its 20-years of low productivity and deflation. China will experience capital destructive boom-bust cycles. Germany may be the sanest of all by ignoring the conventional Keynesian wisdom by cutting government spending.
A sobering thought is that these capital destroying policies are being exported to developing countries as well. As these economies emerge from controlled economies to freer systems, they need time to amass capital to drive their growth. Most advanced economies experienced a century or more of rather hands-off capitalism before they turned into welfare states and regulated economies. China cannot morph into a dynamic capitalistic economy by burning up capital of its entrepreneurs through graft, wasteful spending, and harsh regulations.
There is no refuge from the world’s plunge into massive capital destruction. At one time in history you could flee to countries with freedom and free markets, such as America. With the globalization of Neo-Keynesian economics, there is no refuge. Watch out for EMDs: the economics of mass destruction is here.
* * * * *
For those who wish a printable PDF of the entire article, go here.
»
- advertisements -
CRACKPOT CRITTERS
http://williambanzai7.blogspot.com/2010/09/central-bank-critters.html
THE ALL SEEING ONE
http://williambanzai7.blogspot.com/2010/09/all-seeing-one.html
I like reading your work Econophile. Thanks for sharing. You need to get it up on top so others will spot it.
i agree, thank you.
I don't disagree with the central premise, but to make kynesian thought to equal only the printing of money really isn't accurate.
I see a real effort to demonize something for one aspect of that thing.
keynes would have regulated the banks better, saved during good times to spend in bad. He understaood markets to be unstable.
we are where we are because of the crazy markets are self correcting rational ideology. You take the minimal suprervision role of that then add the policy of bailouts and endless stimulus then you get to where we are.
It is the combination that has proved so dangerous. it is the combination that ensure heads I win, tails you loose. don't regulate or restrict, then bail out and stimulate. this way we alwyas end up paying for banks when they mal invest or engage in fraud, etc. This is our bastard system and the great majority of pundits on this web site have no real understanding of the two working together to produce th worst possable outcome for the largest majority of people.
You think keynes would want big corporate oligarch banks with no oversight or limits. He wouldn't. They would be broken up and limited to not be a systemic risk with tax payer back up.
I am not aware of any evidence to support your claim of Keynes as all-seeing beneficial regulator. In any event, we are ruled by men, not angels, and regulation by men has proven to be corrupt, inefficient, and highly damaging to the general economic welfare. The increase in income disparity has also paralleled the increase in central planning and government regulation.
"I am not aware of any evidence to support your claim of Keynes as all-seeing beneficial regulator."
Me neither, but there's plenty of evidence that Keynes was a crackpot and pseudoscientist. His confused, fallacious theories were thoroughly repudiated by Henry Hazlitt in Failure of the New Economics.
"In any event, we are ruled by men, not angels, and regulation by men has proven to be corrupt, inefficient, and highly damaging to the general economic welfare."
To be ruled by angels would be similarly harmful. For example, an angelic Federal Reserve Chairman, no matter how well-meaning, cannot properly set the interest rate to the value that a group of countless free market participants would choose to have the market clear at. This angel is a price-fixer, fixing the price of loanable funds. This angel cannot help but generate distortions in the economy, including boom and bust cycles.
Indeed, if the Fed did not Centrally Plan the cost of funding for its friends, they would have all gone broke by now and we would be half way to fixing this economic mess.
The solution to too much debt ? More debt.
Benny and the Inkjets have misallocated more investment than anyone in history.
"Keynes would have regulated the banks better." Man, how I wish I had your channeling ability. Having read every single thing Keynes ever published (some more than once), I will tell you that you are...wrong. Spectacularly, stupidly, and astoundingly wrong. Keynes was, first and foremost, a statist. He believed primarily in power, and how best to achieve it for himself. His "economics" varied based on his desire to ingratiate himself with whomever's boot (or dick) he could lick to further his own personal interests.
But he continues to fool generations of nitwits, who pay no real attention to his writings and his life, and who really, really WANT to believe in his fairy tales.
Econophile: +1000
I really do not have time to quote entire passages of a book, but I will assume the work of Minsky is acceptable to most considering the events of this crisis he predicted very well. for those in question I ask you to read minsky stabilizing and unstable econmy. from chaper 5
"it is ironic that an economic theory that purports to be based on Keynes fails because it can not explain instbility. The essential aspect of Keyne's general theory is a deep for an analysis of how financial forces (wall street) intereact with production.
Minsky goes on to say our current neoclassical systhesis ignores this instability.
Keyne's analysis that leads to a deeper result provides a foundation for an alternativ economic theory that leads to an understanding of instability
The process of assimilating Keynes's general theory to the previous tradition ...... in this process important aspects of Keynes's theoretical structure, which lead to revolutionary insights inot the functioning of capitialism and to serious critique were ignored. which is why Joan Robinson called standard Keynesianism "bastard Keynesianism"
The elements of Keynes that are ignored in the neoclassica systhesis deal with the pricing of capitial assets and the special properties of economies with capitialist financial institutions (wall street).
The neoclassical synthesis emphasizes equilibrium and equilibrating tendencies, whereas Keynes theory revolves around bankers and businessmen making deals on wall street. The neoclassical synthesis ignores the capitialist nature of the economy, a fact that Keynes theory is well aware of"
The visions, constructs and results of neoclassical price theory are all pre keynesian in the sense that all the problems and the insights of keynes introducted into theory are nowhere evident. the neoclassical synthesis is however an amalgam of prekeynesian theory with ideas and constructs derived from keynes's great work. the amalgamation does not take place in price theory it takes place where the domain of economic analysis is extended to include determination of employment, money wages, and prices in money terms.
Then people should read chapter 6: the title: The current standard theory: The after Keynes synthesis:
Keynes theory of a capitialist economuu integrates the operations of wall street into the detrmination of what happens in the economy. One of the peculiarities of the neoclassical theory that preceded Keynes ad the neoclassical systhesis that now dominates economic theory is that neither allows the activities that take place on wall street to have any significant imopact upon the coordination or lack of coordination of the economy
the neoclassical systhesis became the economics of capitialism without capitialists, capitial assets, and financial markets. as a result very little of Keynes has survived today in standard ecomics.
There is much more on the subject in the text. whole chapters.
OK, first I will overlook your spelling errors and agrammatia, except to point out that if you attempt to use sophisticated language and fail in the basics, I suspect that most intelligent people will disregard your entire argument (and with good reason).
Again, I say, without equivocation: Keynes was wrong. His "General Theory" is full of holes, shallow, and ignores obvious axiomatic facts about the world normal humans live in. Your argument is, essentially, the one used by all the looney Marxists in the world, who when confronted by the spectacular failure of socialism/communism/Marxism in EVERY ONE of its incarnations, as in...
"It may not have worked, but, well.... that wasn't REAL Marxism!!!!!"
Bullshit. Your argument is bullshit, and Keynes theory was bullshit. Its formulation was accepted by the idiots of the day because they were all more stupid than he. It is accepted by dullards of today because they believe the "experts", and are afraid to trust their own rational capacity.
Try again. D-.
keynes was a man of his time as we are of ours. making reference to keynes without referencing facts of the Great Depression is like talking about the Titanic without referencing the North Atlantic during a "particular time of year." i would say this: Keynes may have sounded like a statist but he sure didn't act like one. he had no trouble making a profit for himself.
"With the globalization of Neo-Keynesian economics, there is no refuge." It appears to me that's by design. Like the new out of country banking laws and such to tighten the noose.
+1
I don't understand why somebody junked you.
Two points in support of your position:
Perhaps the junker didn't like the "by design" thought. However, that's the one I don't care about: Whether it was *intentionally* or *accidentally* designed, the behavior of the system is merely centrally-planned mis-allocation of capital from which there is no escape.
That's not an over-the-top statement: From a clinical perspective, it is entirely defensible.
I think it's even worse than the author posits. That is, capital is not only simply wasted but the interest payments due are malignant.
+1 to both of you -- good article, Econophile.
I second that opinion.
As a baseline, it should be noted that it took the USSR 70 years (1920 to 1990) to utterly consume all the capital it started with and collapse. This despite the central planning of govt to re-direct existing capital resources to favored sectors like heavy industry as well as transfering capital resources from captured areas of Eastern Europe after WWII.