The Symptoms Are Not The Disease

EconomicsThumbby Cato   8/12/14
Much is written about what’s wrong with the American economy.  Most of it focuses upon symptoms … slack capital investment and missing jobs … either ignoring the underlying disease or confusing the disease with the cure.

Why is private investment and growth so subdued compared to previous recessions?  In particular, why are labor markets so slow to recover….

EmployRecMar2014-600x389

…. and why are so many millions of people out of work so much longer than in the past?

Ted-Kavadas-140416-Fig-8-600x398

Weak economic growth and soft labor rates are symptoms.  The disease is progressive economics and politics.

The primary agents of infection are the Federal Reserve’s QE (money printing) and ZIRP (Zero Interest Rate Policy) monetary policies and the Obama administration’s regulatory and taxation policies.

Progressives will argue that regulation is necessary.  But hyper-regulation by the increasingly militarized Federal bureaucracy is equivalent to blood-letting in medieval times; draining the lifeblood out of the economy to get rid of the “evil”.  Drain out a little, the economy slows.  Drain out more, the economy staggers. Drain enough, the economy dies.

Progressives will also argue that the Federal Reserve’s QE and ZIRP are not infectious diseases but wonder drugs for a sick economy.  In small doses and for a short time in crisis this is so; even morphine and cocaine have medicinal uses in small quantities for short periods.  In huge doses administered for years, however … as it was pumped into the nation’s veins in the late 1970s and as it is being pumped at present … the Fed’s monetary drugs become addictive and destructive. They become the disease.  They harm far more than help.

Keynesian pushers like Paul Krugman and Joe Stiglitz argue we need more money printing and lower interest rates, more QE and ZIRP, not less.  They argue there’s no inflation in the system, so there’s lots of room for more money printing.  They are wrong.

inflation-1872-present-alt-cpi

The blue area in the graphic above is officially measured inflation.  Red is deflation.  Note that the gray area originates in the 1980s and expands to the present day.  Cynically, we made small changes in the way we calculate inflation in the 1980s.  We changed the equation to reduce the impact on inflation-adjusted federal outlays like Social Security.  We then changed the metric again aggressively and repeatedly in 1990s and 2000s, distorting the data more each time, always reducing the number, making inflation metrics a total fiction today.

The gray area on the graphic is what inflation would be today if we had not made those many changes; if we still calculated inflation as we did for decades prior to the 1980s.  If the official numbers were honest, in other words, the gray area would be blue.

The difference today is about 2% official inflation (blue) versus about 9% (gray) based on the pre-1982 calculation.  Inflation isn’t absent, it’s just been officially “recalculated” and adjusted away.  Proof of the adage, if you still need proof, that there are lies, damn lies, and government statistics.

Inflation is not merely rising prices.  Prices rise (and fall) for lots of good free market reasons related to supply and demand.  The disease of inflation results in rising prices, too, but it reflects not the increasing value of a good or service, but rather the decreasing value of each dollar used to pay for that good or service.  Specifically, inflation is the result of the bastardization of the currency due to irresponsible printing of money.

CEO’s are not stupid and don’t believe the official inflation numbers. CEO’s don’t invest where the currency is being bastardized.  CEO’s don’t grow the business where growth is being punished by regulators and bureaucrats. Global firms can invest and grow elsewhere in the world, but it’s entrepreneurship in the US that really flounders.  Smaller domestic companies just aren’t started, or deliberately remain small.

Because of currency manipulation, bastardized statistics and ‘blood letting’ regulation, we are stricken with weak investment and low growth of GDP and payrolls.  It really is just that straightforward.

As with patients of crude medieval medicine, the US economy has been made sicker and weaker with each application of the Fed’s QE and ZIRP drugs … so much so that even the Keynesian high priests of the Federal Reserve now fear an overdose and have slowly withdrawn QE this year.  Withdrawal is going to be painful.  The economy has also been made sicker and weaker with each wave of regulation and government intervention, the largest of which, recently, are ObamaCare and the EPA’s war on carbon.

This can be depressing but here is cause for hope and a basis for optimism.  The US economy is surviving, even growing fitfully, not because of but in spite of these diseased policies and infectious interventions.  The economy … the American people … just refuses to roll over.  We aren’t French.  Think of this as a kind of American immune system, reacting to the progressive viruses and malpractice with millions of small acts of rebellion and defiance.

We will thrive again, but the economy won’t fully heal until these political diseases are eradicated.


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15 Responses to The Symptoms Are Not The Disease

  1. Timothy Lane says:

    What liberals refuse to see is that all regulations have costs. They made have benefits that exceed their costs, but they do have costs, and a refusal to see that leads to the current era of extreme micro-management. (I recall seeing some allegorical cartoon in the 1960s about lumbering in a fictitious nation that showed the consequences of excessive regulation.)

    One example of the modification of the CPI is that they no longer take fuel and food into account because they’re so volatile. This would be a valid argument for intra-year comparisons, but not for year-to-year. But with oil prices doubling under the Black God (with inevitable consequences for all other goods) and his anti-energy cabal, that becomes very convenient for using official data to deceive the public, as liberals routinely do.

    Also relevant to inflation is the cost of tax increases. I think the tax cuts of the 1980s were crucial to breaking the pattern of cost-push inflation: They meant that wages didn’t need to be pushed higher as fast to make up for inflation. Unfortunately, it also works in reverse with the Obama Gang constantly seeking to raise taxes.

    This also hurts investment. I haven’t seen it mentioned anywhere else, but the point of investing money is to sacrifice money now to get more money later. Inflation is a relevant consideration (more dollars means a lot less as the dollar declines in value) — but so is tax rate. If I sacrifice $1000 now to make more money later, it matters if the taxes I pay later are likely to be significantly higher than those I would pay now if I didn’t invest them.

    I once saw a 3-step test of the pace of inflation. To start with, someone who sees (for example) a chair will buy it or not based purely on need and cost. Later, they will buy in the present based on the anticipation of needing it in the future when the price will be higher. And finally, they reach the point that it doesn’t matter if they ever expect to need the chair — soon enough it will be worth more than the money.

    My high school European history text presented a similar story from Germany during the hyper-inflation of the early 1920s. There was a story of 2 sons who each inherited a modest fortune from their father when he died. One invested it wisely and thereby increased his fortune; the other spent his on a wine cellar (which he tended to drink up almost as fast as he bought it). Then came inflation, and the first brother’s wise investments became worthless. But the second brother found that his empties were still assets with some value (as was any remaining wine), which could be traded for necessities.

    • NAHALKIDES NAHALKIDES says:

      ” If I sacrifice $1000 now to make more money later, it matters if the taxes I pay later are likely to be significantly higher than those I would pay now if I didn’t invest them.”

      A very important point, Tim. Everyone knows the Democrats long to raise taxes even further, and since we can’t be sure they won’t win, investors are reluctant to invest their money in ways that would benefit the economy (business expansion) and instead buy tax-free municipal bonds, which only helps over-spending cities. Businesses sit on their cash for fear that the Democrats will either tax away their future profits or regulate their businesses out of existence after they’ve committed their funds to invest in new ventures.

      • Timothy Lane says:

        Throughout his presidency, Barry Zero has sought to increase taxes on business and the wealthy. It would be very natural for them to react accordingly when it comes to making investments.

  2. Kung Fu Zu Kung Fu Zu says:

    Cynically, we made small changes in the way we calculate inflation in the 1980s. We changed the equation to reduce the impact on inflation-adjusted federal outlays like Social Security. We then changed the metric again aggressively and repeatedly in 1990s and 2000s, distorting the data more each time, always reducing the number, making inflation metrics a total fiction today.

    Thank you for pointing this out. The consumer knows from personal observation that the government claims on inflation are lies. Thus government statistics are just one more “fact” which has led to the public’s loss of trust in our governmental institutions.

    The disease of inflation results in rising prices, too, but it reflects not the increasing value of a good or service, but rather the decreasing value of each dollar used to pay for that good or service. Specifically, inflation is the result of the bastardization of the currency due to irresponsible printing of money.

    And it is through the bastardized dollar that the government plans to pay for the national debt, if they plan to pay it at all.

    The primary agents of infection are the Federal Reserve’s QE (money printing) and ZIRP (Zero Interest Rate Policy) monetary policies

    I would appreciate you thoughts on the responsibility of Greenspan’s low interest rate policies in the housing bubble.

    • Cato says:

      The fact that Greenspan has been backtracking and hedging in the last couple years on the decisions he made as Fed Chairman speaks much more loudly than I ever could to the errors he made. I go beyond criticism of the actions of any Fed Board of Governors or Chair, though, KFZ. I think the entire notion of an activist Fed, with only the exception of being a lender of last resort for the banking system, is a mistake. The core of that activism was laid down in the 1970s when Congress expanded the Fed’s charter to include targeting low unemployment as a Fed goal. This opened the floodgate to the ‘politization’ of the Fed and led directly to the massive inflation we endured during the Carter years. The fact is that the Fed has replaced Congress as the focus of our hopes for a vibrant recovery; we hang on every word a Fed member utters and it’s absurd. The paltry nature of that recovery in the industrial West … including Japan and Europe … is just further proof of the systemic limits of the Federal Reserve/activist central bank system.

      • Timothy Lane says:

        I remember a lot of conservative criticism of Humphrey-Hawkins back then. But they never tried to do anything about it. Partly that reflects the difference between Republicans and conservatives.

        • Cato says:

          It also reflects the veto-proof Senate and massive majorities in the House the Democrats had. We got the government, and the inflation and grinding recession, we voted for as a people. Every generation it seems we have to learn this lesson all over again.

      • Kung Fu Zu Kung Fu Zu says:

        The paltry nature of that recovery in the industrial West … including Japan and Europe … is just further proof of the systemic limits of the Federal Reserve/activist central bank system.

        I saw the results of such a system in 1980’s Japan, where there were negative interest rates at one time. When banks effectively pay people and companies to borrow money, bubbles are inevitable.

        Low interest rates helped fuel a housing boom, property values spiked. People could not get value out of their houses unless they sold them and this was no solution unless one moved from Japan, and I know people who did that. Rental returns were about 1-2% of value. So property owners went to banks to obtain loans on their homes and invested the loaned funds in the Nikkei market. The market reached ridiculous heights and when the Nikkei fell because of huge over-valuation the house of cards came tumbling down. Japan went through more than a decade of no growth and they are still suffering from the after effects of the late 1980’s boom/bust.

        Something similar happened in the Asian financial crisis of 1997.

        • Cato says:

          The central myth of central banking is that it can and will remain independent of the political state; of the last election returns. This has never and will never be true. All else follows from that.

  3. Kathy says:

    The lazy-minded seem to believe that the nobility of their ideas allows, nay, demands the subjugation of the rights of others, and the rejection of truth. Example: “health care is a right” is such a noble idea that we simply must take from some to provide this tangible benefit to others.

    The idea rejects that our rights come from our Creator, and that for a right to be a right it must be shared by all simultaneously. But because of the grand nobility of the idea, it captures the imagination of those who don’t think the idea through.

    It’s our lazy-minded neighbors with noble motivations that are the trouble, and the solution, don’t you think?

    • Timothy Lane says:

      The important point is the difference between negative and positive rights. Negative rights (such as the right to freedom of speech, the press, and religion, none of which liberals support today for those who disagree with them) require only that others not act illegally to suppress them. (Thus, Brad is under no legal obligation to provide a forum for leftists as well as sensible people, but he is also not permitted to physically attack liberals for disagreeing with him, as liberals frequently do to conservatives.) Positive rights, however, requite some to provide something (such as “free” healthcare) to others. Thus, negative rights are truly equal (we all have identical rights), but positive rights aren’t (since someone must supply the “free” goods).

  4. Glenn Fairman says:

    I was wondering if Cato would explain how the current regime’s economic policies helps the “rich.” I do not doubt that it does, but I need some ammunition for future debates. It would seem that this is a short term strategy, since in the long run, the machine falls to pieces. I await your answer.

    • Timothy Lane says:

      They don’t help the rich as a general group; however, their crony capitalism helps rich supporters in a variety of ways. Boondoggles such as Solyndra are the most obvious version, but having Eric Holder and the IRS (Anselmi and Scalise to Obama’s Capone) in their pocket can be very helpful. Activist groups with high-salaried executives benefit from colluding with regulatory agencies such as the EPA.

    • Cato says:

      Glenn: let me see what I can put together in this regard, do a little research, focusing specifically on the monetary side of things. Tim Lane’s reply to you, above, goes more to the regulatory and campaign issues, and there’s substance there in my mind. But the mechanism by which those who already have substantial wealth benefit from the Fed’s actions is, just thinking about it a bit, both subtle and pernicious on the one hand, and a bit overstated on the other. I’ll reference your request when I’m able to write something coherent about it.

  5. Pingback: Real Inflation | Rebel Yid - Ideas beyond the left/right, red/blue, and liberal/conservative thinking

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