by 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….
…. and why are so many millions of people out of work so much longer than in the past?
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.
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.
Cato blogs at Cato’s Domain.
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