Demand-Side Dementia: Symptoms and Prognosis of the Keynesian Madness

I’ve written before about the Keynesian obsession with consumer “mood.” Keynesian economics focuses on consumer spending as the key factor in economics — consumption being the “demand side,” as opposed to the “supply side” of capital investment.

In a recession, the Keynesian naturally wants to put the consumer on the couch, shrink his head and figure out how to get him spending money again. Hence, Conor Clarke’s dispute with Martin Feldstein:

This is an argument based on Ricardian Equivalence — the theory that it doesn’t matter whether the government uses debt or taxation to finance its spending, since, if the government uses debt, the perfectly rational robot-people will lower their present spending in anticipation of higher future taxes. . . . That households “will recognize” the budget constraint and “will reduce” their present spending accordingly suggests a mechanism as predictable as night following day.

What’s going on here is Clarke’s criticism of Feldstein’s argument that Obama’s proposed tax increases, which wouldn’t become effective until 2011, will discourage consumer spending in the near term.

If what you’re doing is try to figure out the impact of policy on consumer decision-making, then Feldstein’s speculation — about the consumer reducing spending now because he comprehends that government deficits will require higher taxes in the future — is worthy of Clarke’s mockery of “rational robot-people.”

The problem with both Feldstein and Clarke’s approach, however, is the assumption that consumer behavior is:

• (a) controlled by a “mood” independent of underlying economic reality; and
• (b) more important than the behavior of investors.

In truth, it doesn’t matter whether consumers are rational or irrational. The consumer’s ability to spend money is limited by how much money he has to spend. He may have money saved, he may be earning money as wages, he may borrow money, and/or he may liquidate some of his assets. But one way or another, he must have money before he can spend money.

Surveys of consumer confidence are useful in near-term economic forecasting — for example, if what you’re trying to do is predict retail sales during the Christmas shopping season. Yet no matter how irrational consumers may be, their “confidence” is not entirely independent of their means.

More importantly, the demand-side obsession gets causality backward. Economic growth boosts consumer confidence, not the other way around. Discussion of the consumer “mood” is therefore irrelevant to the project at hand: Developing government policy to promote recovery in the wake of a massive market collapse.

In this situation Keynesian policy prescriptions are like sending a gunshot victim to group therapy where he can discuss his feelings about his sucking chest wound.

The Keynesians seem to believe that the economy is suffering from a self-esteem problem. This isn’t that kind of recession. We have sustained a traumatic wipeout of asset value, the result of which is a capital shortage, and you can’t make capitalism work without capital.

The policies of the Obama administration and Democrats in Congress are the exact opposite of what should be done to address this situation. Rather than enacting policies that would encourage capital formation and productive investment, they are siphoning capital out of the market via unprecedented levels of deficit spending.

Martin Feldstein and Conor Clarke are both wrong. The near-term impact of deficit spending and higher taxation on consumer “mood” is irrelevant to why the Keynesian formula won’t work. It won’t work because this huge increase in government spending — whether paid for by taxation, borrowing, or inflation — sucks money out of the private sector at a time when the private sector desperately needs an infusion of capital.

It Won’t Work. The Fundamentals Still Suck. Economics Is Not a Popularity Contest.

Profit = ‘corporate greed’

AT&T actually made a profit last year, which means they’re guilty of “corporate greed,” according to the Communications Workers of America union:

Thursday, union leaders delivered a petition with 3,500 names on it declaring “corporate greed” and calling on the company to settle on a fair labor agreement.

The very fact that AT&T is profitable is cited by CWA as evidence of the company’s evil. As I wrote at The American Spectator:

CWA’s political action committee collected $7.6 million in the 2008 election cycle, and 98% of its contributions went to Democrats. But only profitable corporations — not unions or Democrats — are ever guilty of “greed.”

Read the whole thing.

Patriarchal misogyny triumphant!

NEW GALLUP POLL:

More Americans “Pro-Life” Than
“Pro-Choice” for First Time

And why? Because they hate women! Because abortion is the most important part of a woman’s existence, anyone who opposes abortion is an oppressive hater. (You tell ’em, Amanda Marcotte!)

Too bad Gallup couldn’t have announced this poll during National Offend A Feminist Week.

(H/T: Memeorandum.)

But why did Obama say that?

Everybody is quoting the remarks President Obama made yesterday in New Mexico, in which he called deficit spending “unsustainable“:

“We can’t keep on just borrowing from China . . We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt. . . . It will have a dampening effect on our economy.”

Which sounds like he read my blog yesterday. Given the $789 billion stimulus that Obama pushed through Congress in February, and given that his first annual budget plan is $1.8 trillion in the red, this “debt is bad” speech provokes a lot of eye-rolling from conservatives. Instapundit is flabbergasted, for example, and Professor Jacobson sees this as an expedition into “economic bizarro land.”

The question that intrigues me, however, is why Obama suddenly decided to start talking like a fiscal hawk. Did his speechwriters just decide to recycle phrases from last year’s campaign speeches, when Obama routinely excoriated the Bush administration for its deficit spending? Or is this some new rhetorical gambit?

Jules Crittenden says he’s actually “encouraged” to hear Obama acknowledge the negative economic impact of deficit spending. Don’t get encouraged too fast, Jules.

My guess is that this “debt is bad” line is not about cutting spending. It’s about raising taxes.

That is to say, if we assume that this speech about “unsustainable” debt signals a new theme that will become part of the administration’s economic policy, Obama can only be laying the groundwork for massive tax hikes:

• A. We can’t keep borrowing money, because that will “have a dampening effect on our economy”;
• B. However, we can’t cut entitlement spending, because that would hurt poor people and old people who are dependent on federal aid;

Ergo . . .

• C. We must raise taxes on “the rich,” who “aren’t paying their fair share.”

And if any critic dares to point out that raising taxes will also “have a dampening effect,” Obama will be prepared to accuse them of fiscal irresponsibility. This is essentially a repeat of what Walter Mondale did in his 1984 presidential campaign, when he promised to raise taxes, trying to cast the tax-cutting Reagan as a reckless spendthrift.

We’ll see if Obama has any more luck with this argument than Mondale did.

Wicked Witch of the West Roundup

by Smitty

The Pelosi schadenfreude is something to behold. Here is a roundup of reactions and highlights:

• Common Cents:
  Not since Bill Clinton has a politician been more blatantly caught in a lie that Nancy Pelosi in the last weeks. Her ongoing story explaining what she knew about CIA enhanced terrorism techniques have at least five different endings. Her Thursday press conference was painful to watch but we have it here for you.
• Monique Stewart seems to crave a thing rarely seen inside the beltway:
  I’m not trying to help the Democrats. It just seems to me, they would gain a lot more respect, and a lot more support, if they would just admit that they knew what was going on, and in light of what had happened (that being the greatest terrorist attack on American soil) they supported it. They did, or supported, what most of us would have done, or supported.
• Gary Graham at Big Hollywood Big Irony: Waterboard Pelosi — Let’s Get to the Truth!. Gary offers a less than impressed review of the today’s press conference. I would come up with some rejoinder using the words “wench” and “quench”, but that would hardly be respectful of the Office of the Speaker of the House.
• Larry Johnson at No Quarter: Nancy Pelosi, A Lying C******n:
  That’s right. She’s a lying Congresswoman. Good God! How brazen and how stupid can the leader of congressional Democrats be? Are they going to tolerate this kind of smear of the CIA?
• John at PowerLine inquires Can Pelosi Survive?. Following some choice quotes concerning the press conference, we get:
  As the Washington Post’s Chris Cillizza notes, Pelosi “would not have held this sort of press conference unless she and her inner circle believed that she was losing altitude — politically — on the issue.” But it seems clear that she has now gone too far. The matter cannot be left to rest with her assertion that the CIA “lied” to her and “misled the Congress of the United States.” The Agency will have to respond. And already, Republicans Pete Hoekstra and John Boehner have called on the CIA to release the Agency’s detailed notes on its briefings of Congress to Hoekstra as ranking member of the House Intelligence Committee.

  I don’t suppose anyone imagines that the CIA was foolish enough to lie to Pelosi and others about the use of waterboarding. On the contrary, it seems obvious that everyone in the chain of command was covering himself or herself by disseminating information about the harsh interrogations of three al Qaeda leaders. Pelosi has now opened the lid on a box that she will not be able to close. The CIA has no choice but to defend itself by demonstrating that she, not the Agency, is lying. Possibly Leon Panetta can save her, but at the moment, it is hard to see how this affair can end with Pelosi remaining as Speaker of the House.

• Moving leftward, we have Alan Colmes:
  And, not surprisingly, the right wing has taken the blame for torture and placed it squarely on Nancy Pelosi, removing themselves from the equation.

No, Alan. No one is coming out in favor of torture, or denying events. The attack on Pelosi has everything to do with her non-command of basic things like facts and integrity with respect to her involvment. Stephen Green, he of the Stoli glass and steely nerve, managed to diagram the trajectory of Pelosi’s prevarications as only a professional blogger can:

Oh, the Huffington Post offers the same aplogies: “I wasn’t briefed, I was informed that somebody else had been briefed about it,” she said.
Yeah, yeah.
Recalls a movie line: “My best friend’s sister’s boyfriend’s brother’s girlfriend heard from this guy who knows this kid who’s going with the girl who saw Ferris get briefed at 31 Flavors last night. I guess it’s pretty serious.”

Related to Madame Speaker’s gyrations is the disintegration of the Rule of Law:

It is bad enough that the administration is selectively mining the Freedom of Information Act, the procedures for declassifying national-defense information (Mandatory Declassification Review, or “MDR”), and the rule of law. What is worse is the objective of this sleight of hand: to present the American people with a skewed perspective of a CIA interrogation program that saved lives and helped keep our citizens safe from additional terrorist attacks after 9/11 — a fact attested to by top intelligence officials from administrations of both parties. President Obama is manipulating the law in a way that reveals — to our enemies and everyone else — sensitive details of the interrogation tactics that were used by the CIA, while at the same time denying the American people a chance to assess the vital information produced by those tactics.

Hm. No *cough*Chrysler*cough* pattern at work here…
Sad state of affairs. Listen, CA-8: please, as a personal favor, vote for any other legal candidate besides the Wicked Witch

Have some decency and regard for the rest of the country. Cindy Sheehan is relatively palatable. While I might not agree with Cindy on much of anything, her integrity is relatively stellar compared to this piece of work Pelosi.

Update:
Sooner than 2010? We should be so fortunate.