Opportunities in smallcaps header image 2

More Voodoo Economics

August 5th, 2011 · No Comments

Larry Kudlow..

So many quotes to chose from, but we’ll just have this one (from this article):

Some of the Paul Krugman left-wing Keynesian types think small budget cuts will throw us into recession. Not a chance. The GDP is roughly $14 trillion, and total budget spending is moving toward $4 trillion. So these are relatively modest cuts. Plus, if government spending more works to grow the economy, why hasn’t massive government spending already worked to grow the economy? Here’s the dirty secret: Smaller government is good for growth.

Uh, where to start..

We’ll start with stating that we have absolutely no problems with people arguing for a small state out of political preference. It’s when they start to argue this out of some sort of economic necessity that we start to balk. The facts simply don’t bear this out.

We go on to the evidence. Here is the IMF, that paragon of left-wing Keynesianism:

“Under the staff projections, expiration of temporary stimulus programs, lower defense spending and new deficit reduction measures will help reduce the federal deficit by 3¾ percent of GDP over the next two fiscal years,subtracting roughly 1 percentage point from GDP growth in both 2012 and 2013.”

This was written before the budget deal, so the effect will be somewhat larger. And in case you didn’t notice, the IMF really isn’t a paragon of Keynesianism, let alone some imaginary left-wing variety that Krugman is supposed to represent. It’s so easy to put labels on people, rather than to deal with their arguments, isn’t it Mr. Kudlow?

We go on with a few questions:

  • Is it a coincidence that the economy is faltering just as the stimulus is wearing out?
  • Does Mr. Kudlow know what would have happened in the absence of any stimulus? Isn’t it the case that many economic variables (output, employment, etc.) were falling just as rapidly, if not more so in 2008 compared to 1929 (after the crash, needless to say), until something arrested its halt. What does Mr. Kudlow think stopped the rot? Could it be the policy reaction that Mr. Kudlow and his ilk are now blaming on
  • How does Mr. Kudlow explain the economic success of countries like Germany, The Netherlands, Denmark, Sweden, Finland, Norway, all with public sectors (and tax intakes) roughly double those of the US? Could it be that a small state is not necessary to have good economic performance?
  • Hasn’t Krugman’s “left-wing” Keynesianism explained much better what’s going on in the economy the last couple of years, most notably the lack of any hyperinflation (argued by those alarmed by “unprecedented money printing”), the presence of near century low interest rates (despite all the hysteria about US public finances)? Doesn’t a simple Keynesian liquidity trap explains this?
  • Can Mr. Kudlow explain why debt induced private spending (the type going on 2001-2008) is supposed to expand production while debt induced public spending (despite record low interest rates) cannot?
  • Is Mr. Kudlow familiar with the concept of a balance sheet recession? Can Mr. Kudlow explain what happens if households start saving more (to rebuild their balance sheets badly hit by the housing crisis, or because they’re unemployed)? What reason do companies have to invest more in that situation, especially considering the fact that they have excess capacity, profits have never been higher and are sitting on $2T+ of cash)? 
  • So if consumers are rebuilding balance sheets, companies not investing more because of consumers not spending, what does Mr. Kudlow think will happen to the economy if the public sector embarks on spending cuts as well?
  • Since Mr. Kudlow seems so fond of cutting back spending, is he aware of the economic effects of this in places like Greece, Portugal, Ireland, The UK?
  • Isn’t it true that most of the successful ‘expansionary’ austerity cases (like Ireland end of the 1980s) involved rapid decrease in interest rates and isn’t the present environment of record low interest rates in the US unlikely to replicate these successes?

Kudlow goes on with more unsubstantiated nonsense

Slowly but surely the Tea Party Republican coalition is turning the tide on spending. Too bad President Obama was out once again this week attacking millionaires, billionaires, businesses, and oil and gas with his usual soak-the-rich class-warfare redistributionism. This kind of politics has helped generate a capital strike by profitable and cash-rich businesses.

Some more questions:

  • Is there any evidence a simple statement from the President can have such dramatic economic consequences as Mr. Kudlow argues?
  • Isn’t it possible to portray his clamour for reduced spending as equally “soak the poor and middle-classes class-warfare” redistributional terms?
  • Isn’t it true that in a time when income distribution was much less unequal, like the 1950s and 1960s, the economy certainly performed no worse, and by many accounts performed a lot better than today?

Apart from the economic effects, income distribution is perhaps better qualified as a political (or even moral) issue. With that in mind, we have a few more questions for Mr. Kudlow:

  • What does Mr. Kudlow think of Warren Buffet paying proportionally) less taxes then his secretary?
  • Is Mr. Kudlow aware of the taxes paid by GE? Google? News Corp (in the low single digits or even negative as in the case of News Corp)?
  • Is Mr. Kudlow aware of research that suggests that most of the social ills in modern society have a strong correlation with income inequality?
  • Isn’t the US one of few developed countries where middle-class incomes stagnated because there was a break-down in the 1970s between wage rises and productivity increases and most of the economic growth from the 1980s onwards going to profits and the top fraction of earnings? 
  • Haven’t those stagnating median wages been an important factor in creating our present economic woes? Wasn’t the only way for median wage earners to share in the increasing wealth to borrow from a liberalized financial sector, creating the explosion in debt that ultimately exploded in 2007-8?

Tags: Reform Capitalism · Voodoo economics