Image credit. A question of which system is better adapted to which task.
Law of Markets argues:
With QE we are not talking about troubled assets or dealing with an emergency. It is just straight out inflation.
Second, inflation has now come to mean rises in prices when once it meant printing money. The Keynesians switched the terminology to movements in prices in the 1930s so that their policies would no longer be immediately described as inflation (discussed in the 2nd ed of my Free Market Economics [FME2] pages 406-408). But let’s not quibble about this. What ought to be understood instead is that the effect of inflating the money supply to fund public spending has a number of possible effects of which higher prices is only one. Without militant unions and continuous labour market pressures to push wages up, inflation in the form of price increases is subdued. And whatever else may be the case at the moment pretty well everywhere, only those in very protected environments are in the mood to be pushing for significantly higher wages that would put their jobs at risk.
The real issue is that the way in which the re-direction of expenditure to the public sector is and will continue to manifest itself in a crumbling capital stock (see FME2: p410). The economy of the United States is falling to bits. It will take a longish time since it has a massive asset base but it is being eroded fast enough, which is evident in the median income data and elsewhere.
Is this view in conflict with what Arnold Kling - in The Segmented Wealth of Nations (see especially the paragraph at the bottom of the post) - identifies as the sources of crisis and contemporary economic change? I don't think so.
For a reminder why shifting toward public sector provision of goods and services is a decision for high cost production, take a look at Government - High-Cost Producer.
The US economy has a competitive intensity problem, and [a] decline in startups is at its core. Startups are the straw that stirs the drink. They generate new innovation (and new jobs) and force incumbents to improve or die. They change everything, creating a healthier, more vibrant economy in the process.
In the US economic ecosystem, startups are wolves. And we need more of them, and the creative destruction they bring, to transform our stagnating economy.
“The best way to get Keystone XL built is to make it irrelevant ...”
From the Canadian perspective, Keystone has become a tractor mired in an interminably muddy field.
In this period of national gloom comes an idea -- a crazy-sounding notion, or maybe, actually, an epiphany. How about an all-Canadian route to liberate that oil sands crude from Alberta’s isolation and America’s fickleness? Canada’s own environmental and aboriginal politics are holding up a shorter and cheaper pipeline to the Pacific that would supply a shipping portal to oil-thirsty Asia.
Instead, go east, all the way to the Atlantic.
The source, including a useful synoptic map of the new pipeline project.
“the best antidote [for the] tendency to caricature one’s opponent”: a list of rules formulated decades ago by the legendary social psychologist and game theorist Anatol Rapoport, best-known for originating the famous tit-of-tat strategy of game theory. Dennett synthesizes the steps:
How to compose a successful critical commentary:
You should attempt to re-express your target’s position so clearly, vividly, and fairly that your target says, “Thanks, I wish I’d thought of putting it that way.
You should list any points of agreement (especially if they are not matters of general or widespread agreement).
You should mention anything you have learned from your target.
Only then are you permitted to say so much as a word of rebuttal or criticism.
... this is actually a sound psychological strategy that accomplishes one key thing: It transforms your opponent into a more receptive audience for your criticism or dissent, which in turn helps advance the discussion.
Chris Berg of Australia's Institute of Public Affairs discusses "Too Big To Fail", and comes to a different conclusion than I do. He argues that the problem cannot be solved because it is an inherent concern of politicians to protect certain companies or institutions from terminal collapse.
I would argue, that only politics can change the present state of affairs. However, if libertarians are unwilling to participate in politics, eschewing the competition for political dominance of the state, matters are indeed bound to linger on in their unsatisfactory condition.
"Too big to fail" describes financial institutions, mostly banks, which have become so large and so deeply integrated into the financial system that if we let them collapse they would take everything else with them.
If a corporation is too big to fail, then, it follows, taxpayers have to bail them out.
It's quite a problem. A market economy is supposed to be dynamic, full of entries and exits. Firms that add economic value thrive. Those that do not go broke.
So bailing out failed companies makes the economy less efficient. More gallingly, it redistributes money from the poor to the rich. And it creates "moral hazard" - a belief by management that ultimately they won't have to pay for their mistakes.
Moral hazard is a particularly severe problem for banks. Banks trade on risk. A bank's basic job is to transform short-term highly liquid deposits into long-term extremely illiquid loans. Too much of the latter will prevent redemption of the former.
Too big to fail encourages banks to make riskier loans. Why wouldn't they? They're not the ones bearing the cost of failure. Taxpayers are.
So it would be great to get rid of too-big-to-fail. Or at least limit it somehow. The Murray Inquiry has a few ideas: higher capital requirements for bigger institutions, for instance, or new procedures for when banks do fail.
But the question isn't what should we do about too-big-to-fail but what can we do about it.
And the answer to that question is almost certainly nothing.
Few presidents have accomplished so much in such a short time—Harding served from March 1921 to August 1923, when he died of a heart attack. As we’ve argued before, the fiscal policies Harding instituted brought the country out of the economic depression occurring as a result of the Great War, a period in which the national debt climbed from $1 billion in 1914 to $24 billion in 1920. It was a dire time: The country was already experiencing rising unemployment just as soldiers were returning home from the war looking for work. Deflation led to bankruptcies and business closures. In urban areas where African-Americans lived in close proximity to whites, race riots broke out.
Harding’s pledge to restore America to a condition of “normalcy” led to his landslide victory in November 1920. In office, he cut government spending to the bone and reduced federal income tax rates across the board. As he said to Congress, the government acted during the war as if “it counted the Treasury inexhaustible”; if that pattern continued, it would result in “inevitable disaster.” To get government spending under control, Harding established the nation’s first Budget Bureau (the forerunner of today’s Office of Management and Budget) in the Treasury Department. As a result, federal spending dropped from $6.3 billion in 1920 to $5 billion in 1921 and then $3.3 billion in 1922. He supported the Revenue Act of 1921, which eliminated the wartime excess-profits tax, lowered the top marginal income tax rate from 73 to 58 percent, decreased surtaxes on incomes above $5,000, and increased exemptions for families.
By the time Harding died, the signs of economic growth were evident.
Ralf Raico offers an excellent panoramic account of the origins of World War I.
As for economic causes and consequences, make sure to read this article in which David Stockman explains that
[...] the Great Depression was born in the extraordinary but unsustainable boom of 1914-1929 that was, in turn, an artificial and bloated project of the warfare and central banking branches of the state, not the free market. Nominal GDP, which had been deformed and bloated to $103 billion by 1929, contracted massively, dropping to only $56 billion by 1933.
Crucially, the overwhelming portion of this unprecedented contraction was in exports, inventories, fixed plant and durable goods—the very sectors that had been artificially hyped. These components declined by $33 billion during the four year contraction and accounted for fully 70 percent of the entire drop in nominal GDP.
So there was no mysterious loss of that Keynesian economic ether called “aggregate demand”, but only the inevitable shrinkage of a state induced boom. It was not the depression bottom of 1933 that was too low, but the wartime debt and speculation bloated peak in 1929 that had been unsustainably too high.
We like to think of our age as one of enlightenment. In fact, we let ourselves be guided by myths in large measure, and use the power of the state to corrupt the sciences until they pander to our mythological preferences, as evidenced amongst others by the Great Global Warming Swindle or the Keynesian promises of magic. As for the latter, David Stockman has this story of Keynesian Japan:
What happened to Japan’s huge savings surplus? The government borrowed it! And wasted it on massive Keynesian stimulus projects that kept the LDP in power for decades but produced bridges and highways to nowhere that will be of no use to Japan’s retirement colony as it ages.
And the adverse demographic tide is indeed powerful as shown by the curve below on Japan’s working age population [see the source]. In a few short years what was a working age population that peaked at 88 million has dropped to 79 million; and it will plunge to below 50 million persons in the next two decades.
What the Keynesian witch-doctors who advised Japan to bury itself in fiscal stimulation since its financial crisis of 1989-1990 did not explain was how this inexorably shrinking population could possibly shoulder the tax burden needed to carry Japan’s massive public debt.
Yet there is no other way out of the Keynesian debt trap in which Japan is no[w] impaled. As the current account, also shown below [see source], continues to worsen, the need to import capital to fund the gap will drive interest rates sharply higher. The burden on Japan’s remaining taxpayers will become crushing.
So the graph below should be pasted on every US Congressman’s forehead. When the debt spiral goes to[o] far—it becomes a devastating financial trap. And it cannot ultimately be solved with money printing because if carried to an extreme—even for the so-called reserve currency—it will destroy the monetary system entirely.
Make sure to read the entire article at the source.
Steve Kates, my favourite economist absolutely nails it:
Economies are driven forward by increases in value adding supply and by absolutely nothing else. Others can tax, steal or otherwise appropriate the productivity of others and squander what they get. But this will NEVER lead to a recovery, not ever. So we have kept rates low and watched as nothing has happened. [...] And it’s not just consumer spending but all unproductive spending that is a draw down on productivity. Consumer demand is, of course, the reason for bothering with any production at all. But if we are thinking about growth and employment, consumer and government demand has nothing to contribute, nothing whatsoever. Nor does mis-directed investment spending. Nor do low interest rates.
However you look at it, this is the core issue of Keynesian economic theory and the policy that comes with it. If it is your conclusion that increases in non-value-adding public spending can contribute to growth and employment you are a Keynesian. If that is not your conclusion, that you think it will make things worse, then you are not. There is nothing else to it. At a minimum 95% of all economists practising today accept the Keynesian premise. At a maximum there may be 5% of the profession who do not. Even with the dismal and disastrous effects of the stimulus everywhere to be seen, either the stimulus was insufficient or it saved us from far worse are the standard answers. That we are now living out the consequences of a major and fundamental error in policy is virtually stated nowhere. The debate over Keynesian economic theory has not even begun never mind having been brought to an end.