(h/t Clonal in comments)
Richard Koo, Chief Economist, Nomura Research Institute at the Closing Panel entitled "Overhangs, Uncertainty and Political Order: Where Do We Go From Here?" at the Institute for New Economic Thinking's (INET) Paradigm Lost Conference in Berlin. April 14, 2012. #inetberlin
It is a real "Great Depression" out there.
ReplyDeleteUS streets full of formerly middle class
Richard Koo is a textbook illustration of the uncanny tendency of "print and spend" economists to be completely undeterred by glaring examples of the failure of the policies they recommend.
ReplyDeleteThe failure of Japan's decades long spendathon, has not deterred Koo from recommending ever more spending. He believes that the occasional attempts to lower deficit spending whenever the economy showed signs of life, were responsible for returning the economy to recession conditions.
As with all things Keynesian, there is a kernel of truth that is hysterically blown out of proportion. Yes, whenever monetary stimulus ends, whether fiscal or monetary in type, the wealth destroying activities brought about by the stimulus and masquerading as "growth" in various economic statistics, tends to stop, and the economy is back to square one. That is to say, the true underlying state of the economy is exposed.
Koo's conclusion that, therefore, the government should print and spend even more, is incorrect. More printing and spending will only bring about more malinvestment, and more wealth destroying activity. It cannot possibly be a cure, when it is the very poison that has weakened the economy to such an extent that any reduction in the government's deficit plunges the economy back into correction.
If government printing and spending are good during recessions, then why aren't they always good?
Mises explains:
"People expatiate on alleged government encouragement of production. However, government does not have the power to encourage one branch of production except by curtailing other branches. It withdraws the factors of production from those branches in which the unhampered market would employ them and directs them into other branches. It little matters what kind of administrative procedures the government resorts to for the realization of this effect. It may subsidize openly or disguise the subsidy in enacting tariffs and thus forcing its subjects to defray the costs. What alone counts is the fact that people are forced to forego some satisfactions which they value more highly and are compensated only by satisfactions which they value less."
"At the bottom of the interventionist argument there is always the idea that the government or the state is an entity outside and above the social process of production, that it owns something which is not derived from taxing its subjects, and that it can spend this mythical something for definite purposes. This is the Santa Claus fable raised by Lord Keynes to the dignity of an economic doctrine and enthusiastically endorsed by all those who expect personal advantage from government spending. As against these popular fallacies there is need to emphasize the truism that a government can spend or invest only what it takes away [Major_Freedom: in real terms] from its citizens and that its additional spending and investment curtails the citizens' spending and investment [Major_Freedom: in real terms] to the full extent of its quantity. While government has no power to make people more prosperous by interference with business, it certainly does have the power to make them less satisfied by restriction of production." - Human Action, 737