Have economists made
themselves irrelevant? If you have any doubts, have a look at the current issue
of the magazine , International Economy, a slick endorsed by former
Federal Reserve chairmen Paul Volcker and Alan Greenspan, by Jean-Claude
Trichet, president of the European Central Bank, by former Secretary of State
George Shultz, and by the New York Times and Washington Post,
both of which declare the magazine to be "ahead of the
curve."
The main feature of the
current issue is "The Great Stimulus Debate." Is the Obama fiscal stimulus
helping the economy or hindering it?
Princeton economics
professor and New York Times columnist Paul Krugman and Moody's
Analytics chief economist Mark Zandi represent the Keynesian view that
government deficit spending is needed to lift the economy out of recession.
Zandi declares that, thanks to the fiscal stimulus, "The economy has made
enormous progress since early 2009," an opinion shared by the President's
Council of Economic Advisors and the Congressional Budget
Office.
The opposite view,
associated with Harvard economics professor Robert Barro and with European
economists, such as Francesco Giavazzi and Marco Pagano and the European Central
Bank, is that government budget surpluses achieved by cutting government
spending spur the economy by reducing the ratio of debt to the Gross Domestic
Product. This is the "let them eat cake school of
economics."
Barro says that fiscal
stimulus has no effect, because people anticipate the future tax increases
implied by government deficits, and increase their personal savings to offset
the added government debt. Giavazzi and Pagano reason that since fiscal stimulus
does not expand the economy, fiscal austerity consisting of higher taxes and
reduced government spending could be the cure for
unemployment.
If one overlooks the real
world and the need of life for sustenance, one can become engrossed in this
debate. However, the minute one looks out the window upon the world, one
realizes that cutting Social Security, Medicare, Medicaid, food stamps, and
housing subsidies when 15 million Americans have lost jobs, medical coverage,
and homes is a certain path to death by starvation, curable diseases, and
exposure, and the loss of the productive labor inputs from 15 million people.
Although some proponents of this anti-Keynesian policy deny that it results in
social upheaval, Gerald Celente's observation is closer to the mark: "When
people have nothing left to lose, they lose it."
The Krugman Keynesian
school is just as deluded. Neither side in "The Great Stimulus Debate" has a
clue that the problem for the U.S. is that a large chunk of U.S. GDP and the
jobs, incomes, and careers associated with it, have been moved offshore and
given to the Chinese, Indians, and others with low wage rates. Profits have
soared on Wall Street, while job prospects for the middle class have been
eliminated.
The offshoring of American
jobs resulted from (1) Wall Street pressures for "higher shareholder returns,"
that is, for more profits, and from (2) no-think economists, such as the ones
engaged in the debate over fiscal stimulus, who mistakenly associated globalism
with free trade instead of with its antithesis -- the pursuit of lowest factor
cost abroad or absolute advantage, the opposite of comparative advantage, which
is the basis for free trade theory. Even Krugman, who has some credentials as a
trade theorist has fallen for the equation of globalism with free
trade.
As economists assume,
incorrectly according to the latest trade theory by Ralph Gomory and William
Baumol, that free trade is always mutually beneficial, economists have failed to
examine the devastatingly harmful effects of offshoring. The more intelligent
among them who point it out are dismissed as "protectionists."
The reason fiscal stimulus
cannot rescue the U.S. economy has nothing to do with the difference between
Barro and Krugman. It has to do with the fact that a large percentage of
high-productivity, high-value-added jobs and the middle class incomes and
careers associated with them have been given to foreigners. What used to be U.S.
GDP is now Chinese, Indian, and other country GDP.
When the jobs have been
shipped overseas, fiscal stimulus does not call workers back to work in order to
meet the rising consumer demand. If fiscal stimulus has any effect, it
stimulates employment in China and India.
The "let them eat cake
school" is equally off the mark. As investment, research, development, etc.,
have been moved offshore, cutting entitlements simply drives the domestic
population deeper in the ground. Americans cannot pay their mortgages, car
payments, tuition, utility bills or, for that matter, any bill, based on Chinese
and Indian pay scales. Therefore, Americans are priced out of the labor market
and become dependencies of the federal budget. "Fiscal consolidation" means
writing off large numbers of humans.
During the Great
Depression, many wage and salary earners were new members of the labor force
arriving from family farms, where many parents and grandparents still supported
themselves. When their city jobs disappeared, many could return to the
farm.
Today farming is in the
hands of agri-business. There are no farms to which the unemployed can
return.
The "let them eat cake
school" never mentions the one point in its favor.The U.S., with all its
huffed-up power and importance, depends on the U.S. dollar as reserve currency.
It is this role of the dollar that allows America to pay for its imports in its
own currency.For a country whose trade is as unbalanced as America's, this privilege
is what keeps the country afloat.
The threats to the
dollar's role are the budget and trade deficits. Both are so large and have
accumulated for so long that the prospect of making good on them has evaporated.
As I have written for a number of years, the U.S. is so dependent on the dollar
as reserve currency that it must have as its main policy goal to preserve that
role.Otherwise, the U.S., an import-dependent country, will be unable to pay
for its excess of imports over its exports.
"Fiscal consolidation,"
the new term for austerity, could save the dollar. However, unless starvation,
homelessness and social upheaval are the goals, the austerity must fall on the
military budget. America cannot afford its multi-trillion dollar wars that serve
only to enrich those invested in the armaments industries. The U.S. cannot
afford the neoconservative dream of world hegemony and a conquered Middle East
open to Israeli colonization.
Is anyone surprised that
not a single proponent of the "let them eat cake school" mentions cutting
military spending? Entitlements, despite the fact that they are paid for by
earmarked taxes and have been in surplus since the Reagan administration, are
always what economists put on the chopping bloc.
Where do the two schools
stand on inflation vs. deflation? We don't have to worry. Martin Feldstein, one
of America's pre-eminent economists says: "The good news is that investors
should worry about neither." His explanation epitomizes the insouciance of
American economists.
Feldstein says that there
cannot be inflation because of the high rate of unemployment and the low rate of
capacity utilization. Thus, "there is little upward pressure on wages and prices
in the United States." Moreover, he says "the recent rise in the value of the
dollar relative to the euro and British pound helps by reducing import
costs."
As for deflation, no risk
there either. The huge deficits prevent deflation, "so the good news is that the
possibility of significant inflation or deflation during the next few years is
low on the list of economic risks faced by the U.S. economy and by financial
investors."
What we have in front of
us is an unaware economics profession. There may be some initial period of
deflation as stock and housing prices decline with the economy, which is headed
down and not up. The deflation will be short lived, because as the government's
deficit rises with the declining economy, the prospect of financing a $2
trillion annual deficit evaporates once individual investors have completed
their flight from the stock market into "safe" government bonds; once the hyped
Greek, Spanish, and Irish crises have driven investors out of euros into
dollars, and once the banks' excess reserves created by the bailout have been
used up in the purchase of Treasuries.
Then what finances the
deficit? Don't look for an answer from either side of The Great Stimulus Debate.
They haven't a clue despite the fact that the answer is
obvious.The Federal Reserve will monetize the federal government deficit. The
result will be high inflation, possibly hyper-inflation and high unemployment
simultaneously.
The no-think economics
establishment has no policy response for economic armageddon, assuming they are
even capable of recognizing it.
Economists who have spent
their professional lives rationalizing "globalism" as good for America have no
idea of the disaster that they have wrought.
Dr. Roberts was educated at Georgia Tech, the University of Virginia, the University of California, Berkeley, and Oxford University where he was a member of Merton College.. He is the author or coauthor of 9 books and has published many articles in journals of scholarship. He served in the Congressional staff and was Assistant Secretary of the U.S. Treasury. He was awarded the Treasury's Silver Medal for "outstanding contributions to the formulation of U.S. economic policy." In 1987 the President of France recognized him as "the artisan of a renewal of economic science and policy" and awarded him the Legion of Honor.
Roberts was associate
editor of the Wall Street Journal and columnist for Business Week, Scripps
Howard News Service, and Creators Syndicate. He was Senior Research Fellow at
the Hoover Institution, Stanford University, and William E. Simon Chair of
Political Economy, Center for Strategic and International Studies, Georgetown
University. He has been a columnist for French, German, and Italian newspapers.
Today he is followed worldwide over the Internet.
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