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The US Economy: A Quick Survey of the Pathetic, the Fallacious and the Ignorant

The National Federation of Independent Businesses recently reported that faced with weakening demand and falling expectations small businesses are still cutting back on inventories and sacking labour. This is appalling news given that small and medium sized businesses drive the US job market. If they cut back or even refuse to hire there is no way big business can pick up the slack. Never mind, though, President Obama and his brilliant economic advisors have come up with a million dollar winner: "green jobs". Each job will cost $135,000 in stimulus money. Pathetic.

I had Obama supporters email me their slavish views on this policy. As expected, they were patent nonsense -- but only to the informed. They correctly noted that the height of real wage rates are basically determined by the capital-labour ratio. It therefore follows that the higher the ratio the higher real wage rates will be. For this to happen the amount of investment per worker in real dollar terms must rise. Presto! The more money Obama spends on these jobs "the more investment there will be and this will raise real wages and increase the demand for labor". No it won't.

Capital goods are glorified tools that raise labour's productivity. Obama's green 'investments' dissipate capital. In other words, they reduce the ratio of capital to labour and hence put downward pressure on real wages. The amount of capital employed per worker in a centralised power station is enormous. But the investment was not made to create jobs it was made to produce electricity at the lowest possible cost for sale to the public.

Now there is absolutely no way under the sun that these green energy jobs could ever match the productivity of power stations. And no matter how many tantrums greenies throw nothing will change that fact. As for any other green jobs in general, it should be carefully noted that they are all labour intensive and as such they add nothing to productivity. They amount to substituting thousands of platinum plated shovels and wheelbarrows for bulldozers.

Only economic growth -- the process of capital accumulation -- can continuously raise a nation's standard of living. What the greens are really proposing, therefore, is a labour intensive economy. This is a recipe for mass poverty. This brings me to George Soros, according to whom the US has experienced 25 years of excess debt and the "The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency".

The credit expansion that Soros condemns was based on Keynesianism and had nothing whatever to do with the dollar being a reserve currency. And it was Keynesianism that destabilised the world's currencies. In fact, one could say that Keynes made Soros a very rich man. Without Keynes' economic nostrums Soros would have been left trying to speculate in pork bellies, leaving the rest of us free of his insufferable moral posturing and his constant attempts to subvert the democratic process.

Yale economist Robert Shiller publicly asserted that the bubble cycle is not finished. According to this brilliant academic: "Bubbles are primarily a social phenomena". I consider this proof positive why parents should not send their children -- unless of course they hate them -- to Yale, Princeton or Harvard. Where in heavens name does Shiller think the credit came from to fuel the bubble? Let me put this in such away that even a highly educated academic can understand it: no credit, no bubble.

Still one must try to be charitable, even to Yale economists. I actually blame James Wilson, founder of The Economist, and John Stuart Mill for this situation. It was this pair, I believe, who were largely responsible for substituting in the 1840s what one might call the Irrational Exuberance theory of the boom-bust cycle for the older classical monetary theory that despite its shortcomings was absolutely correct about the root cause of the so-called cycle.

Then there is manager Bill Gross of Pimco, a man with the reputation of being superstar bond fund manager who thinks this makes him a brilliant economic analyst. His advice -- and I kid you not -- is to keep interest rates artificially low and let rip with the money supply, even though the country just experienced a massive and utterly unprecedented jump in its monetary base.

The man's mind is clearly void of anything resembling monetary theory. It's his opinion that the "economy is far too fragile for the Fed to exit quantitative easing". We are right back to the demand deficiency fallacy, whether he knows it or not. There is no such animal. According to this view consumers buy goods, their spending then becomes the retailer's income which in turn becomes the wholesaler's income and then the manufacturer's income and so on. A very plausible and highly dangerous fallacy.

Business spending drives the economy and not consumer spending, a fact that was once well known. Moreover, the emphasis on consumer spending is assuming a two-stage economy: production and consumption. But it was pointed out more than 70 years ago:

The larger number of payments is not from consumers to producers, but is made between producers and producers, and tends to cancel out in any computation of net incomer of net product value. "In fact, income produced or net product is roughly only about one-third of gross income." [Italics added]. What is cost for one producer is in part income for some other producer, but part of that income the latter has to pay out in costs to other producers in another stage of the productive process (for intermediate products, raw materials, supplies, etc.), and so on. All that is necessary in order that equilibrium be maintained is that consumers' incomes equal the cost of producing consumers' goods; the total of producers' payments necessarily exceeds that of consumers' incomes. (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking and the Business Cycle, Macmillan and Company 1937, p. 71).

If business is neither spending nor hiring then the government's spending program cannot trigger an economic recovery. In any case, as I have said elsewhere, even if business was hiring and spending the Obama administration's spending, borrowing, regulatory, energy and taxation policies will still cripple economic growth.


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