Coping With the Experts

December 14th, 2009

Getting hammered by the worst recession in at least 27 years is bad enough. Adding insult to injury is the fact that we have to listen to the pronouncements of countless experts – most of them self-anointed – on how we got here, where we’re going, how fast we’re traveling and what route will get us back on track.

The barrage of expert commentary completely demoralizes many people. They react with a mixture of bafflement and resignation, the way they do to changes in the weather. This is unnecessary and counterproductive. We are often forced to rely on the expertise of others in our daily lives. Indeed, civilization has advanced directly in proportion to our reliance and dependence on specialists.

We place our lives in the hands of doctors whose science has progressed far beyond the limits of everyday understanding. We entrust our automobiles to auto dealers and repair shops whose technology has outstripped the home-repair practices of yesteryear. We rest our future happiness on the advice of financial planners whose market milieu grows ever more sophisticated and complex.

Experience has taught us reliable everyday techniques for coping with the experts. We should apply these lessons in the realm of economic policy. The obvious place to start is with the economic experts of the current political administration, at the Federal Reserve, the Council of Economic Advisors, the Economic Policy Council and in academia.

“What’s Your Track Record?”

If your life depended on the skill of a surgeon performing a difficult and dangerous operation, wouldn’t you uncover that doctor’s history of performing this procedure? Well, we’re currently undergoing a procedure called “economic stimulus,” performed by Obama administration economists using the techniques of massive deficit spending, money creation and foreign borrowing. These techniques are collectively labeled “Keynesian economics,” after English economist John Maynard Keynes. What is the track record of these people and their policies?

None of them have successfully rescued an economy from recession. Keynesian economics has been practiced throughout the world. Its results have been dismal. The exception was a seven-year stretch in the U.S. during the 1960s – which was followed by over a decade of high inflation and lackluster economic growth during the 1970s.

“What Are Your References?”

Asking for references is standard operating procedure. Keynesian economics can provide lots of references from other countries. Unfortunately, they’re all bad. Keynesian economics was the cutting edge of British socialism in the 1950s and 60s. By the 1970s, economists had invented the term “the British disease” to describe the combination of high inflation, high unemployment and trade-union intransigence that strangled British productivity and growth.

Things got so bad that British Prime Minister James Callaghan repudiated Keynesian economics in a famous speech in 1976, confessing that Britons no longer believed that they could “spend [their] way out of recession.” Other European countries had a similar experience. If anything, Keynesian economics failed even more miserably in the developing world, particularly in India and Africa.

“Are Your Methods Well-Regarded by Other Experts?”

It might make you a little nervous to find out that your current expert is considered a crackpot by other experts in the field. For roughly 45 years, Keynesian economics dominated the theoretical journals and research agendas of economics. Economists talked and wrote of little else. No social-science paradigm has been more thoroughly dissected, tested and discussed than Keynesian economics.

The results of this theoretical obsession were referred to by economist James Dean as “the dissolution of the Keynesian consensus.” Keynesian economics was decisively refuted and rejected by the economics profession, culminating at about 1981. Even Keynesian economists themselves admitted that their ideas lacked “microfoundations;” that is, they were inconsistent with the economic logic of individual and business-firm behavior. When asked how the government should spend money to best stimulate the economy, Keynesian James Tobin replied: “Spending is spending. It doesn’t matter how you spend the money.” This runs directly counter to the bedrock core of economic logic, which supports the proposition that it does matter how the money is spent.

Keynesians reformulated their ideas in the shape of the “New Keynesian Economics.” This may be the biggest tipoff to the extent of the Keynesian debacle – if the old brand is working, you don’t rename it and repackage it. However, the policies now on display in the Obama administration are straight from the Keynesian program of a half-century ago.

“What Other Solutions to Our Problems Exist?”

If an alternative to radical surgery might cure your condition, wouldn’t you want to know about it? In the 1980s, President Ronald Regan and Prime Minister Margaret Thatcher replaced Keynesian economics with a program of market freedom, privatization, lower marginal-tax rates and tight monetary policy. The results were remarkably similar in the two countries. After a sharp recession lasting for nearly two years, both economies rebounded to enjoy a long period of relative prosperity with low inflation. This era came to be called the “Great Moderation” by economic historians. The “British disease” gave way to the “British miracle.” Inflation fell, unemployment fell and economic growth returned.

Meanwhile, India moved away from her Keynesian policies and socialist framework to enjoy the economic growth that had long been predicted for it. China became a world economic superpower largely by forsaking Marxism for a more market-oriented approach. The few African countries that succeeded did so by abandoning Keynesian economics. The Southeast Asian “tigers” became the leading economic-development success story without relying on Keynesian doctrine.

“What are the Unfavorable Side Effects of Your Methods?”

The Hippocratic Oath exhorts doctors to “first, do no harm.”  Worldwide experience has taught us that high inflation follows in the wake of Keynesian economics. Although Keynesians insisted that inflation was simply the price that had to be paid to lower unemployment, the truth proved otherwise. High inflation and high unemployment coexisted side by side and gave rise to the condition nicknamed “stagflation.”

Government bureaucracy combined with Keynesian theory to greatly expand the size and scope of government. Keynesians were so preoccupied with managing and increasing “aggregate demand” that they ignored the supply side of the economy. The “Great Productivity Puzzle” of the 1970s was to explain how and why productivity had declined throughout the Western industrialized countries. Once Keynesian policies were abandoned, the question became academic as productivity soared.

One of the worst side effects of Keynesian economics was its effect on financial markets. Inflation, unemployment and interest rates reached double digits in 1980. Interest rates reached stratospheric heights, briefly climbing above 20%.  For the entire decade of the 1970s, the stock market languished. In real terms, stock indexes ended the decade roughly where they began it. Holders of fixed-income assets, such as bonds and annuities, were devastated by the falling purchasing power of their nominal returns.

“No, thanks. I’ll seek assistance elsewhere”

When the responses to our standard expert questionnaire are unsatisfactory, we politely decline the expert assistance and seek help elsewhere. Our economic-policy questionnaire has been very helpful. It has told us that we should reject the current policy regimen and look for better expert advice.

Now all we need to do is figure out how to accomplish that.

Category: Annuities, Economic Analysis, Economic News | Tags: , , ,

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