Submitted by David Stockman via Contra Corner blog, [21]
Ronald Reagan is surely rolling in his grave. He is credited for much that he didn’t actually accomplish on the economic front, but his most singular real victory - decisive repudiation of the Keynesian macro-economic policy model that had produced stagflationary havoc for more than a decade - overshadows all his fiscal failures and the urban legend that he actually tamed Big Government.
Needless to say, however, that 35-years ago repudiation has now been itself completely repudiated by the keynesian apparatchiks who presently rule the Eccles Building. This week Janet Yellen was at it again, displaying outright contempt for the Gipper’s crowning achievement.
To that end, she announced that interest rates will remain pegged at zero until at least September. That is, the Fed will continue to dispense free money to Wall Street gamblers for what will now be 80 months running.
This lunacy is purportedly necessary to accommodate economic recovery, even if it does fuel the fires of financial speculation. Indeed, one of the Fed’s faithful MSM flaks, Greg Ip of the Wall Street Journal, said as much in a hot off the press column obviously written in the Eccles Building:
There is certainly ample evidence that low rates have fueled speculation, such as higher home and stock prices……This, however, is not automatically a reason to raise rates. The Fed must weigh the benefits of lower unemployment against the probability and potential severity of a (financial) crisis later.
Yes, indeed. This kind of semi-coherent jabbering was front and center during yesterday’s presser by the school marm who has become the nation’s financial suzerain. The fact that it was applauded by Wall Street and Washington alike baldly demonstrates that Reagan’s victory over keynesianism has been wholly reversed. And in the most dangerous manner imaginable.
To be specific, the old-style “fiscal Keynesianism” was rejected fair and square by the process of political democracy. This was the core issue of the 1980 and 1984 elections—-a referendum that was reinforced again and again by the Congressional fiscal policy deliberations of the Reagan era.
Yet during the subsequent decades—–beginning with Alan Greenspan’s appointment to the Fed in 1987—this anti-Keynesian verdict was subverted by conversion of its demand management doctrine to a central banking based modality. The latter gussied-up version of demand management was then migrated to the Eccles Building—— safely out of the reach of the democratic electorate.
In this new domicile, the Keynesian professors and monetary policy apparatchiks, along with their Wall Street henchmen, have seized the levers of power, functioning as unelected monetary gauleiters. That Yellen & Co believe they are in charge of virtually everything on the main street economy and that their writ—-based on nothing more than their own subjective and unexplained wisdom—-now reigns supreme could not have been better expressed than by this ukase from the Fed chair person herself:
“Obviously we have to look at the pace of job creation, we have to look at what’s happening to labor force participation, to part time employment for economic reasons, to job openings, to the pace of quits, to wage inflation and other indicators of the state of the labor market. I did say when we agreed that labor markets slack has diminished to some extent, in the inter-meeting period and clearly over a longer span of time over the last several years, obviously we have made considerable progress in moving towards our goal of maximum employment. So in spite of the fact that there is some progress on that front the committee wants to see some further progress before feeling that it will be appropriate to raise rates.”
That’s right. Yellen averred that she and her posse are in charge of everything, including the status of part-time hot dog vendors and the rate at which ambitious job seekers elect to depart their current employers for greener pastures. Once more, in monitoring every feather on the economic sparrow’s back, they claim the unfettered right to keep shoveling free money to their Wall Street vassals until they get the “feeling that it will be appropriate to raise rates”.
This is unaltered Keynesian claptrap. It is the arrogant over-reach of a model-obsessed academic zealot who has no respect whatsoever for the real main street economy and for the historically proven truth that free markets are the best route to prosperity and higher living standards for the people, not the dictates of central planners.
In claiming the power to manage the microscopic details of the nation’s $18 trillion economy by the month and by the yard, the Yellen Fed has now gone beyond merely instituting some misbegotten labor economist’s version of Keynesian demand management. In fact, when it gets down to insisting that the PCE deflator must rise by at least 2.0%, not 1.4%; or that there is a meaningful difference between 5.5% and 5.2% on flawed metrics like the U-3 unemployment rate; or that the globally impacted trends like the rate of hourly and weekly wage growth are still a few decimal points too low—–what you actually have at that point is an economic putsch.
To be sure, this insanity is being pursued in the name of the so-called “dual mandate” of the Humphrey-Hawkins Act, but that’s exactly the point. The Act is utterly content-free and represents a vague Congressional aspiration in favor of jobs, prosperity, stable prices and motherhood and apple pie, too.
That the power-hungry fanatics who run the Fed have no sense of practicality and self-restraint, and, instead, believe the Act empowers them to target decimal points worth of noise, and to do so in a manner which self-evidently enriches the tiny slice of America which owns most of the financial assets, is nothing less than an unconstitutional usurpation.
Likewise, this same fanaticism is crushing savers and confiscating their wealth and property—–even as these Keynesian central bankers aver that it is all being done for the “common good”. Bernanke never tired of asserting that gibberish.
In the same manner, debtors are being offered explicit government subsidies because that is exactly the purpose of interest rate pegging and repression. That enterprise in wanton redistribution has been falsely explained as the price of “recovery” over and over by Yellen & Co, as well.
And worst of all is the “wealth effects” doctrine and the explicit policy of propping up the stock market in order to make the people feel wealthier and spend more money. That’s “trickle down” economics with malice of forethought. Indeed, Ronald Reagan was pilloried for getting a democratically approved tax cut that makes Yellen’s massive gifts to the wealthy pale into insignificance.
In short, the entire Keynesian central banking model is a sweeping exercise in fiscal policy and a deliberate, massive redistribution of wealth and income orchestrated by the state. It amounts to an economic coup d etat by any other name.
The plenary power over the US financial system and main street economy that our monetary politburo now claims makes the NRA/Blue Eagle statism of FDR’s New Deal—- that was struck down by an old-fashioned Supreme Court in 1935—-look tame by comparison.
That’s why democratic repudiation of fiscal Keynesianism during the Reagan era is so important to recall. Those long ago events help to shine a spotlight on the sweeping fiscal actions of today’s Fed by comparison; they also demonstrate, as an empirical matter, that the rationale for the Fed’s current suffocating intervention is completely bogus.
To wit, Reagan’s anti-Keynesian fiscal policy proved beyond a shadow of doubt that the US economy is not some kind of fragile macro-economic flower incapable of coping with honest interest rates and market-determined financial prices; that it does not have a death wish and tendency to circle the drain of recession and depression; and that with no helping hand from the state at all, it is capable of rebounding vigorously from any punishment the latter may have administered——once “policy” gets out of the way.
Listening to Yellen’s pathetic double talk and paternalism, you would never know that the US economy went through the wringer of the worst recession (at that point) since WWII. But then it promptly rebounded on its own hind legs once the fevers of inflation and speculation were quelled.
Never once did the Reagan White House table any “stimulus” measures or gum about the shortfall of “aggregate demand” or promise to close the “potential output gap” or claim that the job of the state was to ensure “full employment”.
In fact, the Reagan Administration’s policy stance was so thoroughly anti-Keynesian that it enacted a huge tax increase—the equivalent of $350 billion per year in today’s economy—- at the dead-bottom of the recession in mid-1982.
The purpose was long term fiscal stability and sustainability. Even Tip O’Neill, who was crucial to its passage on Capitol Hill, did not get himself all twisted up about the “contractionary” nature of this action. Nor did even a peep to that end emanate from a certain junior economist on the White House staff by the name of Paul Krugman!
The point is, the Reagan era economic policy actions were based on enabling the supply side of the US economy to thrive over the long-haul by minimizing barriers to enterprise and work.
That was the motivation for the original 25% cut in marginal tax rates in 1981. And when a bidding war caused the tax reduction bill to balloon to nearly double its intended size (6% of GDP versus 3.5%), the threat that permanent giant deficits would consume too much of the nation’s investable savings supply was also the basis for the corrective tax increases of 1982-1984.
Yes, there were large fiscal deficits during that period. But they were not predicated on Keynesian “stimulus”. Instead, they were the unintended consequence of an out-of-control defense build-up, too much tax cutting to placate the K-street lobbyists in order to enact pro-growth supply side tax cuts and too little courage and too few votes among the GOP rank and file on Capitol Hill for real shrinkage of the domestic welfare state.
I explained this in more detail in The Great Deformation, but what stands out is this. The great Paul Volcker did not “accommodate” the Reagan deficits and therefore they were not monetized; they competed for available savings. The “accommodation” came years later when push game to shove in an overheated economy and Alan Greenspan opened up the money sluices in order to keep himself in the good graces of the politicians in the White House and on Capitol Hill.
In fact, Volcker proved that Yellen & Co are essentially sniveling cowards who are petrified that Wall Street will have a hissy fit if even a semblance of true market forces are allowed to express themselves in the money and debt markets. By contrast, notwithstanding crashing commodities markets, soaring unemployment and a vast so-called full employment gap in 1981-1982, Volcker courageously permitted money market interest rates to clear in the manner shown below.
That’s how it’s done. Yet the clowns now resident in the Eccles Building are already tweaking their ludicrous “dot plots” so as to keep money market rates pinned to the floor-board nearly as far as the eye can see:
Needless to say, letting the money market clear and the speculative excesses built-up in the structure of wages, prices and costs over the course of a decade to be purged did not send the US economy spiraling down the drain. Instead, even with real interest rates at positive 5% on the 10-year treasury note, the main street economy healed rapidly and never looked back. During the 72 months after the July 1982 bottom, real GDP grew by 30% and jobs by 18% or by 3X more than the pick-up during the last 72 months.
What is the difference between the commodity/wage/CPI inflation back then and the massive financial asset inflation this time around? Ultimately, not very much since both are the destructive economic and financial deformations emitted by the central bank’s printing presses.
What is different is that back then we had a chairman who did not believe that the Fed’s remit encompasses the micromanagement of everything that moves and everything that stands still in the vast expanse of the US economy; and also a thoroughly anti-Keynesian President that backed him all the way in his steely resolve to restore a stable economy based on sound money.
Needless to say, during the numerous sessions in the oval office that I witnessed on these matters, never once did I hear either of them express a worry that American capitalism was so frail that it would any day plunge into a black hole absent 24/7 stimulus by the fiscal and central banking branches of the Federal government.
That particular dogma is the delusion of the Keynesian school marm who now runs the world’s most dangerous financial Ponzi. And owing to her self serving tommyrot , the gamblers and 1 per centers got another bountiful windfall in today’s casino action.
Yes, Ronald Reagan is truly rolling in his grave.
