Tag Archives: Keynes

Chinese Price Hike

Analysts are reading a lot into the PBOC’s recent reduction of its prime lending rate. Gordon Chang, for instance, sees desperation. Chang says lower rates are a reaction to slower growth, and also – in aiding state owned enterprises – a setback for reform.   Jeremiah takes a longer view, looking at growth trends and currency values among China’s trading partners.

Long term, China needs to rebalance its economy more toward domestic consumption. This will stabilize Chinese society by sharing the proceeds of economic success more broadly. It will also give Chinese producers a new market, free of export costs and currency risk.

The obvious way to do this is to allow the Yuan to appreciate, at a measured pace, exactly as China’s trading partners have requested. This will allow America to rebalance more toward production – although we will first have to end our obsession with consumerism. Here is a chart of the Yuan’s ongoing rise versus the dollar.


In the shorter term, however, the Yuan is in the crossfire of a currency war. Try running that chart for the Euro, or the Yen. You may be sure the Yuan will continue to appreciate, but it may be in the relative sense of “less aggressively debauched.”

So, the PBOC cuts rates to keep up (down) with the neighbors. They are also liberalizing rates, allowing them to rise for ordinary savers. This stands in contrast to Europe’s lunatic policy of charging people to keep money in the bank. Lost in the news over China’s lending rate, is this rise in the deposit rate.

As Shaun Rein writes in The End of Cheap China, the impact of China’s rebalancing will be sharply inflationary for America. Not only will we not have cheap goods coming over here, but we will have to bid against a growing Chinese consumer class.

Jeremiah sees a nice symmetry here. In the 1970s, when America was struggling with inflation, we began importing cheap goods from Asia. Now, we will import inflation, which is just what the Keynesian doctors have ordered. Be careful what you wish for.


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Keynesian Blather

YellenPolitical bloggers were not kind to Chairman Yellen’s keynote speech at Jackson Hole. David Stockman called it “Keynesian blather.” Someone else called it an insult to America’s intelligence.

The Fed Chairman makes an easy target, especially if you don’t understand the technical terms. After all, who cares if you’re unemployed for cyclical reasons or structural ones?

Jeremiah prefers to assume people are generally competent for their jobs. We downloaded the speech here. Remember that this is a keynote speech, kicking off a symposium on the labor market. So, when Yellen refers to the unsolved mysteries of employment, that doesn’t mean she’s confused – she is introducing the topics.

Jeremiah was pleased to see that Yellen does not take the headline unemployment figure at face value. She acknowledged the growth in part time employment and the drop in labor force participation. Here are a few of the topics:

  • Is labor force participation off because people have retired, or are they coming back? If people come back en masse, that will drive wages down.
  • Is there “pent up wage deflation?” If so, wages may jump once it has run its course.
  • Have the midlevel jobs gone, to Asia and automation, never to return?

You can see that these are all relevant to ordinary Americans, and relevant to Fed policy. The Fed needs to know whether there is still slack in the labor market, or if our current wretched economy is the new normal. The dual mandate requires the Fed to keep credit conditions easy as long as there is any chance it will help someone find work. This brings us to the Keynesian part.

Keynes reckoned that inflation could reduce unemployment, and this is why the Fed has a dual mandate instead of simply maintaining price stability. In fact, Keynes’ definition of full employment is the level at which inflation can’t help one more guy find work.

Men are involuntarily unemployed if, in the event of a small rise in [inflation], both the aggregate supply of labor willing to work for the current nominal wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.

Lower wages will put more people to work – basic supply and demand – and the role of inflation is to give everyone a pay cut, by reducing the value of their nominal wage. This is a pretty incompetent way to create jobs, and it’s not even a good definition.

There is no magic formula for full employment, any more than there is a magic diet pill. Keynes didn’t have it and, when the symposium is over, Janet Yellen won’t have it either.

Labor is employed when entrepreneurs have profitable projects, capital to invest, and a stable political environment. As public policy, this means the rule of law and – a predictable tax and regulatory regime. Various surveys, including the Fed’s own Beige Book, have indicated this is what’s holding back the job market.

Keynes wrote a system of equilibrium equations, like the ideal gas law. In such a system, aggregate demand for goods cannot be more or less important, as a policy objective, than the aggregate demand for labor.

When companies are starved for workers, they compete by offering higher wages. You guessed it – full employment causes inflation.

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Mind the Wealth Gap

Bubble MachineStandard & Poor’s, God bless ‘em, have figured out that America’s rising wealth gap is responsible for our boom and bust economy. Obviously, blaming anything on a “rising wealth gap” will have a certain political appeal, but – this is to mistake cause and effect.

What Raghuram Rajan and (separately) Larry Summers have said is that the advanced economies ran out of gas in the late twentieth century, leaving us not only in secular stagnation, but with unsustainable social commitments. Since Chairman Greenspan, Fed policy has been to “jump start” the economy with cheap funds, making available – on credit – a lifestyle we can no longer afford.

Those to whom the system brings windfalls … become ‘profiteers’, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.

So, we had an economic boom and the tech bubble in the 1990s, and then a bust. Next, federal policy joined cheap Fed funds to produce the housing bubble, and – now we are on the third bubble in recent memory.

The “rising wealth gap” is responsible for this? Quite the contrary. Our monetary policy is a trillion dollar bubble machine. Whoever is nearest the spigot is going to get rich fast even if – as Keynes observed – he’s not trying. There’s your rising wealth gap. It is an effect, not the cause, of our boom and bust economy.


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The Chosen People

SowellA couple of the Senators who questioned Fed Chair Yellen today mentioned her “historic” appointment.  This is simpleminded identity politics.  The Fed has been run by the tribe for thirty years.  You know which tribe we mean – Keynesians!  So, this one is female.  Big deal.  How about putting Thomas Sowell in there?  Now, that would be historic.

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Bad Idea Roundup

If you followed along with the Booth economics quiz, you may have noticed they didn’t ask about the minimum wage.  That would have been a good fit with the theme – too good, in fact.

Economists know that minimum wage laws are bad for the economy, and create unemployment.  This is contrary to every decent, charitable impulse you might have, and economists would rather not talk about it.

minimum_wageTo a lefty economist like Paul Krugman, minimum wage proposals are kryptonite.  Keynes, his hero, was all about increasing employment through real wage cuts.  The diagram is from Zero Hedge.  The list of bad ideas is from Germany’s Social Democratic party.

  • National minimum wage
  • Lower retirement age
  • More welfare spending
  • Less infrastructure spending
  • Rent controls

The new agenda is opposed by German economists, employers, and even the Bundesbank.  It’s funny to see this happening in Germany.  Why?  Schadenfreude.  Now, if we could only send a copy to China.

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Potemkin Economy

It’s not so unusual for Jeremiah to agree with Paul Krugman.  That is, we agree on the nature and severity of our employment problem, which Prof. Krugman frames poignantly in his editorial.

These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started.

By the way, if you don’t know that Friday’s employment report was dismal, we invite you to peruse table B-1 and discover where the 204,000 new jobs were created.  One post calls them “dead end jobs,” while labor force participation continues its five year descent.

labor forceKrugman deserves credit for framing the problem.  Many pundits seized on the headline number and declared victory.  That’s propaganda.  You will be better informed if you can keep track of which pundits are political shills.

We differ from the professor, however, on solutions.  He seems to have dropped monetary stimulus, at last, but he is still promoting fiscal stimulus.  His editorial also features a straw man, in the form of “debt scolds” unwilling to finance the stimulus.

There are two good arguments against further fiscal stimulus, one practical and one philosophical.  We have already run trillion dollar deficits for five years, including the ARRA stimulus program.  This approach isn’t working.  One analysis found costs up to $500,000 to create a single job.

This brings us to the second argument, which is that we do not trust the federal government to administer a stimulus competently, or even honestly.  We would prefer to have value producing jobs in the private sector, rather than Potemkin jobs in the government.

In clinging to the textbook approach, Krugman is, so to speak, “fighting the last war.”  We differ from his approach because we have a different analysis of the root cause.

Keynes’ great insight was to reanalyze employment in terms of how entrepreneurs make decisions in the real world.  Entrepreneurs today have different reasons not to hire than they did eighty years ago.

Happily, Prof. Krugman does not have to visit the real world.  The Fed does that for us, in the form of their beige book survey.  Entrepreneurs today are fearful of what they perceive to be an anti-business environment in general, and health care reform in particular.

Boeing tangles with the NLRB, and lays off 5,800 workers.  J.P. Morgan tangles with the DOJ, lays off 19,000 workers.  ANR tangles with the EPA, lays off 1,200 workers.  We read stories like this every day in the business press.  It’s not cause and effect, but it creates a climate of fear.

Real intellects know when to adapt their methods.  If Keynes were alive today, he might just say, “let’s try helping the private sector, this time.”

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Consumer Economy

It makes Jeremiah crazy to hear America described as a “consumer economy.”  What is this supposed to mean?  Is the “producer economy” somewhere else?  We should thank them for all this cool stuff.

People who say “consumer economy” call themselves Keynesians, and they have the best imaginable fiscal policy.  All we have to do is spend more!  On credit!  Policy makers who talk like this are mostly crooks, who think you are dumb enough to keep voting for a gravy train which is now plainly off the rails.

The problem Sir John presented in the General Theory was, “what if aggregate demand is too low to support full employment?”  Since one man’s purchase is another man’s revenue, reduced consumption can hurt the jobs market.  Consumption, production, and employment go round in a circle. KeynesIf it’s a circle, though, how can aggregate demand be less than income?  It’s because people are putting money in the bank, making productive investments, and storing their capacity for future consumption.  That’s why we have added the electrical symbol for a capacitor.

Keynes described the problem of too much saving – hardly the problem we have today.  In this case, fiscal and monetary stimulus could be used to jump start the economy – inflation, to prise money out of the banks, and government spending to create jobs.

This is why people think, “the debt doesn’t matter because we owe it to ourselves.”  Once upon a time, our economy was a closed system, and  the national debt was held by American banks.  Keynes never imagined that we  would be in debt 100% of GDP, still spending, and still without jobs.

This brings us to our second electrical symbol, the one for “ground.”  No amount of stimulus is going to create jobs, if the money is used to buy foreign goods – at least, not jobs in America.

See also:  Essay on Protectionism

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