The G20 leaders recently called upon the leaders of the developed nations to employ more massive amounts of debt financed government spending to ward off the current economic stagnation and in some instances the early stages of recession. That fits Einstein’s definition of insanity: “doing the same thing over and over again but expecting a different result”. The pursuit of so-called “macroeconomic (fiscal and monetary) policies” has produced a quarter century of economic stagnation in Japan, a $30 trillion debt bubble in China with little to show, and stagnation and looming recession in Europe and increasingly in the US.
Einstein was a genius who remains relevant today. Just within the last few weeks evidence was reported of gravitational waves predicted by Einstein almost a century ago. Proving Einstein’s theories has been the focus of physics during the past century, but he maintained that had he been able to get an academic appointment instead of a position at the Swiss patent office he never would have been able to develop and publish his new path-breaking theories.
In his recently released biography The Courage to Act (2015), former Federal Reserve Chairman Ben Bernanke describes how, initially failing physics, he turned to macroeconomics as an outlet for his mathematical skills. This was auspicious. In physics, when your equations don’t fit the reality it is the equations that must be changed unless there is new evidence to change the understanding of reality. Einstein’s biggest error was rather than waiting for better data when his equations predicted an expanding universe, he fudged the equation (introducing the Max Planck constant) to fit the current understanding of a stagnant universe, then disagreed for most of his lifetime with the next generation of quantum physicists who proved he had gotten it right in the first place. Einstein’s one mistake is the modus operandi of modern macroeconomists.
Adam Smith, Scottish moral philosopher and political scientist in the Department of Political Economy at Glasgow University, is considered to have fathered modern economics in 1776 with the publication of The Wealth of Nations. The name of this discipline was shortened to just “economics” by Alfred Marshall around the turn of the 20th Century as mathematical models were being applied to describe economies in the same way as physicists used mathematics to describe the universe, suggesting that they were powered by some unidentified source (“animal spirits”?) rather than politicians (although interestingly Glasgow University didn’t make this name change until 1986).
Once mathematical models were assumed to accurately explain economies, they could be used not only for prediction but to change the future, presumably for the better, by encouraging political intervention in the present. The father of this discipline, famed British economist John Maynard Keynes, before he died almost three quarters of a century ago provided quotes to fit many situations including the present:
“The difficulty lies not so much in developing new ideas as in escaping from old ones.”
“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”
Keynes might well have agreed that the current global economy managed in his name is insane. If there was a flaw in his genius, it was in believing that he could manipulate politicians to his ever changing will, but the reality was quite the opposite:
“I work for a Government I despise for ends I think criminal.”
The macroeconomics profession (of which I was once a part) self-selects the delusional. They must first delude themselves that politicians are “policymakers” in pursuit of the public interest – in contradistinction to microeconomists who assume people (of which politicians remain a subset) pursue their own rational self-interest, historically a sufficiently accurate conclusion. Some macroeconomists “advise” on “fiscal” tax, expenditure and regulatory policies, to little effect other than providing political scapegoats for “unintended consequences”. Those who choose monetary policy have more power due to the Federal Reserve’s historic pretense of political independence, and Fed employment is the ultimate destination for the truly delusional.
The Fed’s original purported mission was to prevent inflation: total cumulative inflation in the century before the Fed was about 7%, and after was about 2300%. Their second de facto mission was to mitigate systemic financial sector failure, which arguably didn’t occur in the pre-Fed century but not coincidently has repeatedly occurred since, most recently with the bursting of the sub-prime lending bubble and globally systemic financial system collapse of 2008. Since 1978 the Fed’s mandate has included promoting full employment, to no good effect.
The Fed’s self financing (it effectively “prints” the money to fund itself) has allowed it to delude itself and the public regarding its performance. It has generally accommodated politicians wanting to avoid accountability for crony capitalist policies that mostly redistribute income regressively, then bails out the victims – “moral hazard” be damned to some distant future. In more market oriented economies the least malignant manifestation of this lack of accountability is in distorting reality by massaging or changing the statistics (from the Greek word for “state”) by which its performance is measured. But the long run consequences of activist central bank management of the economy are best illustrated by the extremes of bureaucratic economic management.
As first described in Hayek’s Road to Serfdom (1944), when planned economies didn’t behave according to plan, totalitarian methods were employed to force them to do so. Consistent with totalitarian impulses, the past is rewritten to reflect the models and the distorted vision of present reality is measured against an Armageddon scenario asserted in the absence of such totalitarian intervention, a process colorfully described in George Orwell’s 1949 dystopian novel 1984. Critics of Fed activism – and Chairman Bernanke was the most active ever – argue that it takes more courage not to act.
The Soviet Union was extremely successful economically from the perspective of US macroeconomists when it unexpectedly failed systemically in 1989, because its GDP was growing and unemployment was only about 1%. But GDP measures total expenditures, not value, and about 60% of the labor force was producing goods for which the final market value was less than the value of the non-labor inputs. Politicians promote full – rather than productive – employment because an idle workforce threatens the political status quo, but systemic economic failure is the inevitable end result of chronic macroeconomic money printing and political spending. War against real and perceived external enemies is the ultimate political full employment tool.
The increasing size and power of government, particularly the US federal government, reflects the political proclivity toward crony capitalism and “rent seeking”. To increase his political base, former President Bill Clinton extended the rent seeking political elite beyond those directly employed, funded or protected by government to community action groups, diverting capital to millions of homebuyers that couldn’t otherwise afford it, resulting in the sub-prime lending debacle. Democratic candidate Bernie Sanders correctly attacks his rival Hillary Clinton as a crony capitalist, but has a bad sense of direction, attacking Wall Street rather than Pennsylvania Avenue. The democratic constituency is now mostly composed of a barbell political elite that excludes the middle class.
Of the 17 initial declared Republican candidates, there are essentially three remaining: The two anti-establishment Tea Party candidates, Cruz and Rubio, previously opposed by Republican “political elites”, and Donald Trump, historically a Democrat that the Republican establishment thought would have long since faded away. Cruz started as a Constitutionally limited small government libertarian, but subsequently dropped the antiwar part of the platform in competition with the consistently hawkish Rubio. Trump appeals to those currently working in the private sector, i.e., not part of the political elite (to which he belongs): they expect him to shout the politically incorrect phrase “you’re fired” at current elites.
That requires extraordinary power, but:
“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.”
All modern Presidents and Federal Reserve Chairmen (and ladies) aspire to greatness. Hence the electorate’s dilemma.
Author of Occupy Pennsylvania Avenue