• Tag Archives economics
  • Keynes Is the Freddie Krueger of Economics

    Keynesian economics is like Freddie Krueger, constantly reappearing after logical people assumed it was dead. The fact that various stimulus schemes inevitably fail should be the death knell for the theory, which is basically the “perpetual motion machine” of economics.

    Indeed, I’ve wondered whether we’ve reached the point where the “debilitating drug” of Keynesianism has “jumped the shark.”

    Yet Keynesian economics has “perplexing durability,” probably because the theory tells politicians that their vice of profligacy is actually a virtue.

    But there are some economists who genuinely seem to believe that government can artificially boost growth. They claim terrorist attacks and alien attacks can be good for growth if they lead to more spending. They even think natural disasters are good for the economy.

    I’m not joking. As reported by CNBC, the President of the New York Federal Reserve actually thinks the economy is stimulated when wealth is destroyed.

    Hurricanes Harvey and Irma actually will lead to increased economic activity over the long run, New York Fed President William Dudley said in an interview. …”The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”

    I’m always stunned when sentient adults make this kind of statement.

    Should we invite ISIS into the country to blow up some bridges? Should we dynamite new buildings? Should we pray for an earthquake to destroy a big city? Should we have a war, featuring lots of spending and destruction?

    All of those things, along with hurricanes and floods, are good for growth according to Keynesian theory.

    Jeff Jacoby explains why this is poisonous economic analysis.

    Could anything be more absurd? The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. …No, hurricanes are not good for the economy. Neither are floods, earthquakes, or massacres. When windows are shattered, all of humanity is left materially worse off. There is no financial “glint of silver lining.” To claim otherwise is delusional.

    By the way, I don’t think any Keynesians actually want disasters to happen.

    They’re simply making a “silver lining” argument that a bad event will lead to more spending. In their world, what drives the economy is consumption, and it’s the role of government to either consume directly or to give money to people so they will spend it.

    In a recent interview, I pointed out that investment and production are the real keys to growth (which is why I prefer GDI over GDP). Increased consumption, I explained, is a result of growth, not the cause of growth.

    You’ll notice I also threw in a jab at the state and local tax deduction, a loophole that needs to be abolished as part of tax reform.

    But let’s not get sidetracked.

    For those who want to do some additional reading on Keynesian economics, I recommend this new study by a couple of professors. Here’s a blurb from the abstract.

    …Keynesians assert that even wasteful government spending can be desirable because any spending is better than nothing. This simple Keynesian approach fails to account, however, for several significant sources of cost. In addition to the cost of waste inherent in government spending, financing that spending requires taxation, which entails an excess burden. Furthermore, the employment of even previously idle resources involves opportunity costs.

    I’ll close by augmenting theory and academic analysis with some real-world observations.

    Keynesian economics didn’t work for Hoover and Roosevelt, hasn’t worked for Japan, didn’t work for Obama, and didn’t work in Australia. Indeed, Keynesians can’t point to a single success story anywhere in the world at any point in history.

    Though they always have an excuse. The government should have spent more, they tell us.

    P.S. Since their lavish tax-free salaries are dependent on pleasing the governments that finance their budgets, international bureaucrats try to justify Keynesian economics. Here’s some recent economic alchemy from the IMF and OECD.

    P.P.S. I frequently urge people to watch my video debunking Keynesian economics. Though I admit it’s not nearly as entertaining as the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

    Reprinted from International Liberty.


    Daniel J. Mitchell

    Daniel J. Mitchell is a Washington-based economist who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

    This article was originally published on FEE.org. Read the original article.



  • How the Debate on Climate Change Is Cooling Down

    In a previous column, I noted that the typical audience reaction to my talks about the improving state of the world is not joy and thankfulness for the progress that humanity is making in tackling age-old problems such as infant mortality, malnutrition, and illiteracy. Rather, it is the concern about the exhaustion of natural resources and the supposedly irreparable harm that humanity is causing to the environment.

    Apocalyptic warnings about the end of the world as we know it are as old as humanity itself, but recent news should give the doomsayers some food for thought and lower the temperature, so to speak, in the debate about global warming and its future effects on the planet.

    The Models Were Wrong

    In a new study that was published in the journal Nature Geoscience, leading climate scientists have adjusted their previous predictions about global warming and stated that the worst impacts of climate change are still avoidable. Professor Michael Grubb, an international energy and climate change scientist at University College London, said that previous scientific estimates were incorrect because they were based on computer models that were running “on the hot side.”

    According to the new estimates, the world is more likely than previously thought to achieve the main goal of the 2015 Paris agreement and limit global warming to only 1.5°C higher than was the case in the pre-industrial era. Only two years ago, many scientists dismissed the 1.5°C goal as too optimistic and Professor Grubb went as far to say that “all the evidence from the past 15 years leads me to conclude that actually delivering 1.5°C” is unattainable.

    While it is true that the average global temperature is 0.9°C higher than in the pre-industrial era, the scientists now admit that there was a slowdown in warming in the 15 years prior to 2014 – a slowdown that the models did not predict or account for. Professor Myles Allen, another one of the study’s authors, said “We haven’t seen that rapid acceleration in warming after 2000 that we see in the models. We haven’t seen that in the observations.”

    What has changed in the model forecasts since the Paris summit in 2015? The data showing that the climate models are running “on the hot side” has been available for years. In 2015, my colleagues Patrick Michaels and Chip Knappenberger noted that climate models have been overestimating the rate of warming for decades. In 2016, John Christy from the University of Alabama in Huntsville testified before the US Congress that the climate models were inaccurate. For their trouble, all three have been labeled “climate change deniers.”

    The Nature Geoscience study suggests that humanity has more time to transition away from fossil fuels. Should it? That’s debatable, argues William Nordhaus, a professor of economics at Yale University, and his coauthor Andrew Moffatt, in a recently released paper for the National Bureau of Economic Research. The paper combines econometric and climate models to estimate the future impact of global warming on worldwide income.

    The Laws of Economics Still Apply

    By studying 36 estimates of the costs of global warming, the pair predicts that 3°C warming will reduce global income by 2.04 percent and 6°C warming will reduce global income by 8.16 percent by 2100. Nordhaus and Moffatt’s estimates parallel the broad consensus. For example, the IPCC in their Fourth Report estimated that global “mean losses could be 1 to 5 percent of GDP for 4°C of warming”.

    As Ronald Bailey of Reason magazine calculates, current global average income per capita is about $10,000. If the world grows at 3 percent per year over the next 80 years or so, global average income per capita will rise to $97,000. According to Nordhaus and Moffatt’s estimations, therefore, an increase in global temperature by 3°C would reduce global average income per capita by $2,000 to $95,000. A 6°C increase in global temperature would reduce global average income per capita by $8,000 to $89,000.

    “We have a predicament,” Bailey concludes. “How much are we willing to spend in order to make those living in 2100, who will likely be at least nine times richer than us today, $2,000 better off?”

    That is not a purely academic question. Thanks to the concerns over global warming, governments throughout the world have been busy imposing serious additional costs on economic development and reducing real living standards of ordinary people so as to facilitate the fastest possible transition away from fossil fuels. The above studies add to the complexity surrounding the subject of global warming and human response to it. They also strengthen the case of those who argue that any such transition should be driven by technological change, not government mandates.

    Reprinted from CapX


    Marian L. Tupy

    Marian L. Tupy is the editor of HumanProgress.org and a senior policy analyst at the Center for Global Liberty and Prosperity.

    This article was originally published on FEE.org. Read the original article.


  • Stop Conflating Inequality With Poverty

    The problem of inequality has often been considered to be one of the biggest social problems of our generation.

    Widespread concern about the great disparities of income and wealth have fueled anti-globalization sentiments all around the world, and threaten to undermine the advances in trade, investment, and immigration we have seen.

    One key problem is that contemporary discussions of inequality have often conflated it with poverty. Not only are inequality and poverty conceptually distinct, a failure to distinguish between them can lead to problematic policy conclusions. Additionally, when market advocates criticize redistributive policies and government welfare programs, they are seen as anti-poor. Thus, separating these two concepts can help market advocates regain the moral high ground in this debate.

    Conflating Inequality and Poverty

    It is generally assumed that inequality implies poverty, i.e. the rich people are prospering, so poor people must be suffering. This conflation is very subtle and is best seen through the presentation of inequality in the widely-used high school economics textbook Economics (7th ed) by John Sloman (2009). According to Sloman (2009, p. 276):

    Inequality is one of the most contentious issues in the world of economics and politics. Some people have incomes far in excess of what they need to enjoy a luxurious lifestyle, while others struggle to purchase even the basic necessities. The need for redistribution from rich to poor is broadly accepted across the political spectrum. Thus the government taxes the rich more than the poor and then transfers some of the proceeds to the poor, either as cash benefits or in kind.”

    The chapter seeks to explain the phenomenon of inequality but, almost imperceptibly within this opening paragraph, implicitly suggests that under such unequal situations, there are poor people who “struggle to purchase even the basic necessities.” In fact, this is not necessarily the case.

    Inequality in relation to income simply means the existence of a gap between those who earn the most and those who earn the least. The mere existence of an income gap, even if it’s widening, says nothing about the actual income levels of those who do earn the least. In other words, an income gap does not necessarily mean that those at the lowest income brackets are poor. Just because Bill Gates is loaded with greenbacks and is many times richer than I am does not, by itself, suggest that I am “poor” in an absolute sense.

    It is clear that a society with a very uneven distribution of income can still be one with high levels of absolute prosperity, in such a way that even those who earn the least (relatively) have enough to survive – comfortably.

    Implications of the Conflation

    Not only is it possible that the least well-off in unequal societies have enough to survive, it is actually likely for them to be much better off in unequal societies than in more equal ones.

    Assuming the absence of crony capitalism, income inequality is a corollary of a free, dynamic, and growing economy that increases prosperity for all.

    Attempts to close inequality through standard welfare-state policies such as redistributive taxes, subsidies, minimum wage laws, price controls, and the public provision of “free social goods” like health care can, and often have, slowed down economic growth. Thus impacting the generation of wealth that the least-well-off depend on.

    Put another way, policy attempts to fight inequality retard economic growth, slow down poverty reduction at best, and exacerbate poverty at worst.

    Aside from the economic costs of state-centric welfare programs, there are less quantifiable human costs as well. Generous welfare programs often trap individuals in a state of dependency on the government, which not only disincentivizes them from working but robs them of the dignity and sense of achievement that comes from earning their own income and being independent and self-sufficient.

    Consequently, if poor people were truly at the center of our attention, we should endorse inequality, or at least the market system it is based on. When people are left free to trade, invest and innovate in the market, inequality is inevitable simply because people are different, and some may be more adept at spotting profit opportunities. Yet, if this system is left largely unhampered, it generates vast amounts of wealth that benefits everyone, including the least well off.

    This is precisely why poverty rates have fallen dramatically in the recent age of globalisation, and, to that extent, so has global inequality.

    The above does not mean that there is no role for government in social policymaking. Yet there is a need to ensure that implemented policies facilitate wealth-creation for all rather than redraw the relative shares of the economic pie. The social policies implemented in the country of Singapore provide useful lessons on how best to help the least well off in any society.

    Social Policies that Reward Working

    Singapore’s social-welfare system is based on the fundamental principle of meritocracy, considered a cardinal principle in the Singaporean psyche. It has been said that one of the shared values in Singapore is “work for reward, reward for work.” Even where government assistance is provided to the least-well-off, such schemes are carefully designed to promote and encourage work and thus to promote self-reliance. The belief is that Singaporeans should work and take care of themselves, rather than solely depend on the government.

    These principles are reflected in several key initiatives. A testament to its pro-work orientation, Singapore’s main “welfare” scheme is titled “Workfare”. One of its components is the Workfare Income Supplement, which provides a cash payment to low-income individuals who are working. It is not a “free handout” but essentially an incentive to encourage work.

    A further illustration of Singapore’s pro-work orientation is the other component of this policy: a training support scheme, which incentivizes workers to upgrade their skills in order to increase their productivity and thus their earning potential.

    Singapore has also deliberately rejected a national minimum wage law. In its place, it has instead introduced a targeted “Progressive Wage Model” in several low-wage sectors such as cleaning, security, and landscaping. Employers in these sectors are expected to pay their workers a minimum but are also incentivized to send them for retraining in order to increase their productivity. Where typical minimum wage legislation simply expects employers to pay the mandated wage, Singapore’s take on it goes further in its encouragement of productivity improvements.

    Subsidies are also provided but only in a limited and targeted fashion. In the healthcare sector, for example, individuals are expected to make co-payments for their medical expenses and cannot rely on government subsidies to simply cover 100% of their bill. More aid is in fact given to the neediest individuals who cannot afford even basic essentials, but the principle of self-responsibility looms heavy in the Singapore system. Not surprisingly, health outcomes in Singapore far exceed those of the United States, even though it spends only a fraction of its GDP on health care in comparison to the USA.

    Growth-Oriented Policy

    These Singaporean social policies might remain anathema to purist libertarians, who prefer to eliminate all social assistance entirely, but if we must have social welfare policies in the world of here and now, there is a lot to admire in this system. Particularly when observing its targeted, limited nature and its pro-work, pro-responsibility orientation.

    Singapore’s leaders have managed to identify the difference between inequality and poverty, and have opted to pursue growth-oriented policies, sometimes even at the expense of the income gap. The Prime Minister Lee Hsien Loong said in 2013:

    If I can get another ten billionaires to move to Singapore, my Gini coefficient will get worse, but I think Singaporeans will be better off because they will bring in business, bring in opportunities, open new doors, and create new jobs.”

    In conclusion, there is cause for concern about most societies’ obsessive focus on inequality at the expense of the very poor. Conflating inequality and poverty can ironically lead to misguided policies that ultimately hurt the poor.

    The next time you’re asked about whether you care about the “problem of inequality”, respond in the negative and that you care too much for poor people instead. Market advocates should always frame markets as a powerful, poverty-killing device, and regain the moral high ground in this most essential debate.

    References:

    Sloman, John, & Wride, Alison (2009). Economics (7th ed.). Edinburgh Gate: Pearson Education.


    Bryan Cheang

    Bryan Cheang is a graduate student of Political Economy at King’s College London. He is interested in researching into the moral status of markets, and how market institutions promote human welfare. He is also the President of the Singapore Chapter of Students for Liberty.

    This article was originally published on FEE.org. Read the original article.