Monday, February 16, 2009

Japan GDP/ Economists: Secular Theologians with a lot of Numbers

During the 4th quarter, Japan's GDP contracted at a worse than expected 12.7% on an annualized basis with exports tumbling 13.9%. MarketWatch There was a report that Japan was preparing yet another stimulus, somewhere in the range of $325 billion. Japan is the world's second largest economy.

More downbeat news is expected this week. MarketWatch

I spent an hour reading recommendations and ruminations from economists who are more philosophers or secular theologians. Generally, once you listen to Larry Kudlow for about two minutes you know every cliche in their economic vocabulary. It is important for Kudlow to appear certain, invariably pedantic, frequently condescending, and never humble, as if those qualities made his economic cliches a form of immutable wisdom. But, being someone who is practical, grounded in common sense observations of the real world, and having no training in the theology with a lot of numbers called economics, I can only say for certain that the blogs that I read today sounded to me like a rehash of cliches dogmatically promulgated as equivalent to the gospel by Rutledge, Kudlow and their less well known fellow travelers. Possibly all economists are merely secular theologians and philosophers including the ones who follow Keynes. I will go with the observations of the Nobel prize winner Friedrich von Hayek who said in his 1974 acceptance speech that "as a profession we have made a mess of things" Friedrich August von Hayek - Prize Lecture

Greenspan, if I am not mistaken, was an economist too and highly regarded by many until recently.

Oddly, even with the capital gains rate at 15%, these secular theologians believe that an even lower rate is the answer to our problems along with cutting the corporate tax rate. Somehow, decisions to spur economic growth would be made based on a capital gains rate of say 7 1/2% rather than a mere 15%, as if any sensible person capable of operating a real business would make decisions to start a new business, or expand an existing one, based on such a difference.

 These economists are not practical people. Moreover, many of them point to other countries with lower corporate tax rates as some kind of proof of their theories, and those countries are fairing worse than the U.S. now. AT & T and VZ/Limbaugh, the Titular Head of the GOP, on How to Save the Economy/ Dems Go Wild in Stimulus Package/GOP and the Lochner Era The Washington Monthly As noted in a post from yesterday, the decline in GDP is worse in the Euro nations than in the U.S. The GOP's New Alternate Reality: Obama is to Blame for our Troubles/Put on a Happy Face Beanpole/ Japan-US Comparisons Continued/GM Wants more dough

One of their shining beacons is Ireland with a 12.5% corporate tax rate. The Washington Monthly Ireland information on economic freedom | Facts, data, analysis, charts and more The Irish Central Bank forecasts a 4% decline in the Irish economy in 2009, and for unemployment to hit a 13 year high. Herald Tribune For 2008, the Irish Central Bank says that GNP fell by 2.6%, worse than the U.S. None of this will have any impact on the True Believers and their cult like theory that a cut in the corporate tax rate will somehow be the magic elixir to jump start the world's economies.

Somehow, I do not think these secular theologians with a lot of numbers have yet to grasp the complexities of human beings in their economic interactions. Part of the problem is how does one isolate one event in an economy as large and complex as ours, interconnected and dependent on other complex economies around the world, to determine cause and effect. For those who recommend the magic elixir of tax cuts for the wealthy, trickle down economics, and freedom from regulation, the current economic crisis requires some ingenuity to explain, plus a disregard for inconsistent facts, since their policies were in effect for the past eight years. They point to the Reagan presidency, preferring to ignore eight years of Bush, as proof that tax cuts generate by themselves economic growth. I am certainly grateful for the Reagan tax cuts since I was at the time paying the top marginal rate on earned income at the time which was 50%. Tax Cuts for the Wealthy: A Perpetual Growth Machine?/ Job losses/commercial real estate goes begging in Middle Tennessee

But, I also remember that Paul Volcker had raised the federal funds rate to over ten per cent to stamp out inflation, and the early years of the Reagan Presidency were marked by a recession. When Volcker took his foot off the brake, and allowed interest rates to fall, the economy started to take off. Paul Volcker - Wikipedia

How much did the Federal Reserve's actions in eliminating stagflation, engineering a fall in the inflation rate to 3.2% in 1983 from 13.5% in 1981 cause the subsequent recovery lasting a few years, independent of any tax policies? I have seen many recessions and recoveries from recessions in my life. So, how much of the recovery starting in 1982 was due to the Federal Reserve strangling inflation with its monetary policy, and then allowing interest rates to fall, and how much to the Reagan tax cuts? Theologians with numbers like Kudlow and Rutledge will attribute most of the positive gains to just the tax cuts.

And, to add to the complexity further, was the recovery partly tied to the Reagan's enormous deficit spending, a Keynesian approach. Keynesian economics - Wikipedia, the free encyclopedia, and to a natural process of recoveries following economic downturns? Reagan did raise deficit spending to the highest level of GDP since WWII. National debt went from 900 billion to 2.8 trillion during Reagan's two terms. Reaganomics - Wikipedia

I really do not understand the republicans when they say government spending with borrowed money is not a stimulus to the economy. My discussion in this post is not aimed at resolving the issues raised one way or the other but simply to point to the complexities that never seemed to be acknowledged by the theologians with a lot of numbers who call themselves economists to achieve a measure of intellectual respectability. And, you will never hear them actually point out facts that undermine their pet theories. Some of the following links contain information that would be frequently ignored or just dismissed with some facial expression indicating that only a fool would raise these points.

Other references:

California continued its inability to deal with a looming 42 billion deficit. WSJ.com

The U.K. said it had not rule out nationalization of its banks but still believed they would be best run in private hands. WSJ.com

I would drop this idea of stress testing the U.S. banks.

1 comment:

  1. I enjoy your daily comments and this was one of the best. The points about deficet spending and lower interest rates are always overlooked in the equation. Great post.

    ReplyDelete