Paul Heise Stuck in Keynesian Mode

Paul Heise is professor emeritus of economics at Lebanon Valley College and has a nice editorial in the Press and Journal today which makes a few good points but makes the same aggravating, blood curling claims about aggregate demand that quite frankly make me want to punch a hole in the wall every time I hear them.  I spent (I should say wasted, but I like to think debates are productive) a good 2-3 hours going over this concept today at Policymic.com.  Anyway, the following is a draft rebuttal to Heise's article:

Paul Heise's recent Press and Journal piece entitled "We Are Becoming a Banana Republic" hits a few good points on the U.S.'s ailing economy but is muddled in Keynesian thought that overly dominates national discourse.  The current recession is a consequence of weak aggregate demand as Heise argues. 
The explanation goes like this: consumers, who are deleveraging large amounts of accumulated debt, have cut down on spending.  Businesses see a lack of demand and are reluctant to invest in new equipment and hiring.  Therefore the government must take up for the slack.  This is the only way to boost the overly simplistic macroeconomic formula of consumption + investment + government = GDP.

To Keynesians, the economy is a circular machine than just needs a measly trillion dollar injection to spin faster.  But herein lies the problem.  Economics isn’t called a dismal science because of its simplicity but because of its complexity.

Human demand is infinite.  As economist Ludwig von Mises, whose neglect during the 20th century ranks as a great injustice to mankind, theorized, people act in order to achieve ends.  If all wants are satisfied, than man does not act.

Professor Heise falls under the same delusion that John M. Keynes suffered from when writing The General Theory.  In attempting to explain identify the root cause of the Great Depression, Keynes claimed the principle that markets clear when prices and wages are allowed to fall uninhibited was proven wrong. He was blind to the policies of Herbert Hoover and Franklin Roosevelt which kept wages and prices artificially elevated thus contributing to massive unemployment.

Markets do in fact clear despite objections by modern Keynesians.

Every consumer good is bought if the price falls low enough. Producers must find this price in order to adopt a new production structure to begin meeting this demand.  Most people aren’t going to pass up a 36 inch television for $5 at Best Buy.  Sure the television producer may fail to garner a profit on this new sales price, but that is why price signals are so important.  They tell producers the structure of production can be adjusted in order to meet this new equilibrium.  Capital not allocated to producing 36 inch televisions means investment in more profitable operations.

Armchair economists like to assume that human action is predictable and calculable.  But action, based solely on individual preference, isn’t measurable with econometric formulas.     

Increased production financed through accumulated savings drives sustainable growth. This goes hand and hand with entrepreneurial seeking of unmet demand, not aggregate demand in general.  Steve Jobs didn’t create the iPod because consumers were spending at Walmart.  He speculated there was a demand for a portable device that could store a massive amount of music, designed the product, determined the marginally profitable price it could be sold at, and decided whether or not to risk his capital and make the whole thing happen.  He could have been wrong, but thankfully for all of us he wasn't.

Heise's claim that cuts in government spending won't lead to growth flies in the face of actual history.  In the Depression of 1920 (betcha don't remember this one brought up in school) unemployment hit 12% and GNP fell 17%.  Yet President Harding slashed income tax rates, cut the government almost in half within two years, and the national debt was reduced by a third.  The Federal Reserve's intervention was "hardly noticeable" according to historian Tom Woods.  What followed would be classified as an economic miracle by today's standards as unemployment fell to 2.4% in 1923.  The market had effectively been allowed to clear without Washington, still not the full blown leviathan created in the New Deal, coming to the rescue.


While Heise is correct in that we live in a country run by corporations that engages in a highly militaristic foreign policy, he naively blames Republicans only.  News flash: both parties are as corrupt as a Chicago election.  In a true free market, corporations only obtain their power and influence from providing goods to consenting consumers.  As long as Uncle Sam has the printing press, war can be fought in perpetuity.  The institution of government which, by definition, exercises a monopoly of force and coercion over a given geographical area provides all the enticements for Wall Street and big business to buddy up with.  Out comes a regulatory state so riddled in mandates and restrictions that small start up companies can't compete.


While Heise hits on some goods points, the elephant in the room known as "kleptocracy through the state" goes unacknowledged.  As he admits, the Fed essentially causes the business cycle.  He is wrong that Fed chairman Bernanke saved the financial system; heroine junkies aren't cured with another fiat injection of dopamine.

With such faulty logic at the helm of mainstream economic discussion, it should come as no surprise why the economy is failing to recover.  Heise would do himself a favor to crack open a copy of Mises' "Human Action" or Murray Rothbard's "Man, Economy, and State" sometime and learn the finer points of praxeology.  The least it could do is show why half a century of Keynesian policy has brought nothing but a global currency race to the bottom.  


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While I recycled a few lines, this will need touched up a bit more as there are too many fallacies to correct in Heise's article.


Now for some real news, the Fed made no new announcements of changes to monetary policy today at the Federal Open Market Committee.  This isn't surprising of course as suppressed interest rates keep the fiat flowing.  It looks like the Fed is awfully pessimistic though:

• FED OFFICIALS SEE 2011 GDP 1.6%-1.7% VS 2.7%-2.9%
• FED OFFICIALS SEE 2012 GDP 2.5%-2.9% VS 3.3%-3.7%
  
• FED OFFICIALS SEE LONGER-RUN GDP 2.4%-2.7% VS 2.5%-2.8%
  
• FED OFFICIALS SEE 2011 UNEMPLOYMENT 9.0%-9.1% VS 8.6%-8.9%
  
• FED OFFICIALS SEE 2012 JOBLESS ESTIMATE 8.5%-8.7% VS 7.8%-8.2%
  
• FED OFFICIALS SEE 2013 JOBLESS ESTIMATE 7.8%-8.2% VS 7.0%-7.5%
  
• FED OFFICIALS SEE LONGER-RUN JOBLESS 5.2%-6.0% VS 5.2%-5.6%

Judging by the past calls of these idiots, I wouldn't trust these numbers more than a hungry crack addict with my wallet.  With S&P 500 firms reporting an increase in earnings of 20.7% compared to last year's third quarter, things don't look so down and out like the Fed thinks.  Meanwhile over in Europe, with Draghi not yet printing at Bernanke type levels and that little old sovereign debt crisis complicating things, the slowdown continues with Germany:

(Reuters) - Germany's manufacturing sector contracted in October for the first time in more than two years as new orders fell for a fourth month in a row, data showed on Wednesday in the latest sign Europe's bulwark economy is set for a sharp slowdown.

Look for an announcement from Draghi soon.  I will end with pointing out this great video on the hilariously wide spread corruption European parliament:

Simply amazing the lengths some politicians go to.