Yesterday …

… Fed chief Ben Bernanke's testimony continued, moving on to Congress from the Senate. Politicians are understandably concerned about the economic situation – especially as it is not only marked by an enormous and seemingly intractable rise in joblessness among the hoi-polloi (that'd be Joe Six Pack, for readers not familiar with this Greek expression, a.k.a. the 'voter'), but because it now threatens their own jobs as well. Forgive us for being so cynical about the political and bureaucratic classes – but the best way to describe their dilemma is probably by comparing them to a parasite apoplectic about the unexpected, but suddenly seemingly possible, demise of its host.


The slightly frightened emotional state of law makers was palpable throughout the proceedings. They are facing a (s)election in November, and it doesn't look good for incumbents, to put it mildly. You have to also keep in mind that most Congressmen are economically illiterate and are hoping for miracles from the Fed chief – who in turn, although a trained economist, is philosophically stuck somewhere between Keynesianism and Monetarism, this is to say, he strongly believes both in the power of deficit spending and money printing to 'avert recession'. At least he has to our knowledge not once said anything that would make one think otherwise. Some of his colleagues at the Fed, such as e.g. Thomas Hoenig, strike us as more thoughtful regarding their appraisal of what the central bank can achieve in this kind of situation, although it remains of course the case that even the most adept central bankers must, by dint of their profession, believe in the efficacy of central monetary planning. This fundamental error is a sine qua non of their very existence as such – if they were to admit that central planning does not work, all of them would have to immediately resign and would no longer have a job. That would be one step of intellectual honesty too far, so to speak.

Moving on to Bernanke's spiel about more deficit spending:


“Testifying before the House Financial Services Committee, Bernanke urged lawmakers to come up with a credible plan to reduce the government's record-high budget deficits in the long run. But he said they shouldn't move now to slash spending or boost taxes in the near future. "I believe we should maintain our stimulus in the short term," Bernanke said as he spoke about the economy's challenges for the second straight day on Capitol Hill.”


This is a typical Keynesian idea molded after St. Augustine of Hippo's famous prayer: “Grant me chastity and continence, oh Lord, just not yet”. You can find similar thoughts expressed in the numerous writings of Paul Krugman, who finds deficit spending very, very -woe! – damaging to the economy when engaged in by Republican administrations, but has a St. Augustinian view of it when Democratic administrations rule the roost. 'Spend now, pay later', so the hue and cry. It is based on the quite mistaken notion that what is good for the over-indebted individual with his or her back to the wall – namely to economize, pay down debt and save – is 'bad for the economy' when too many individuals do it at once. Thus the State, so it is held, must jump into the fray and spend money it doesn't have on things no-one really needs.

This idea is prominently supported by luminaries ranging from Alan (“The real question is not whether we want elements of socialism on planning to abridge our personal freedom, but by how much”) Blinder to Lawrence ('zzzz') Summers, which of course doesn't make it any less wrong. As we pointed out before, Paul Krugman once tried to 'prove' to his readers how deficit spending improves the economy by means of a nifty-looking formula. If there's a formula proving it, it must work, right? The only slight problem with that is that it evidently hasn't worked. Not that this obvious failure, demonstrated in Japan for over two decades and counting and now demonstrated in the US for the past two years as well, will ever deter the tax-and-spenders. After all, they have a formula. However, as usually happens in great contractions, interventionist theories will eventually be shipwrecked by implacable market forces. The question for the citizenry is largely – can the interventionists be stopped before they have spent everything?

As a reminder why the notion that government spending can 'help' he economy is nutty, the government does not possess any resources or wealth of its own. All is can do is shift already existing private wealth forcibly from 'A' to 'B'. The only way this can have a positive effect on the economy is if we were to believe that the government does a better job at allocating scarce resources than the private sector. This in turn runs into the insurmountable calculation problem of socialism. That government spending is a burden on the economy and will destroy even more wealth should be beyond the slightest doubt. Alas, as you can see, the Fed chief believes otherwise.

Bernanke of course also tries to shift some of the 'economy lifting job' back to Congress, as he is encountering some resistance within the Fed regarding the 'Plan B' of printing even more money. It is also a neat way of seeing to it that  the eventual blame is more evenly apportioned between Congress and the Fed once the various interventionist programs have failed.

However, as the press reports note:


“Bernanke is under pressure to keep the recovery going because there's little appetite in Congress to provide a major new stimulus package.”


So we have the politicians and the monetary bureaucracy at odds here, with each of them trying to get the other to 'do something'. Meanwhile, Rep. Spencer Bachus has pointed out what is glaringly obvious:


“[…]Rep. Spencer Bachus of Alabama, and other Republican members complained about the effectiveness of President Barack Obama's $862 billion stimulus package. That has increased government spending and cut taxes at a time when most Republicans and some Democrats are worried about the government's exploding red ink.

"The economic recovery is anemic at best," Bachus said, arguing that the stimulus package hasn't delivered.”


D…d…d…duh. Then Ben Bernanke came out with what sounds like a surprisingly good idea to us:


Bernanke also gave a nod to renewing tax cuts by President George W. Bush, which are set to expire at the end of this year. "In the short term, I would believe that we ought to maintain a reasonable degree of fiscal support — stimulus — for the economy. There are many ways to do that. This is one way," he said.”


It is in fact the only way that makes any sense. If the private sector can be reassured that tax hikes will be averted, then there might actually be an incentive to invest. One of the reasons why the 'tax and spend' policy doesn't work is 'Ricardian equivalence'. The public knows very well that it will have to pay for all the 'free lunches' provided by the government. Thus the prospect of higher taxes and higher inflation, both of which are usually unavoidable after a big spending orgy, leads people to shelve investment plans. Why invest when you know the fruits of your labor will later be confiscated by the State?

However, it must be noted here: for tax cuts to work, they must be accompanied by a commensurate reduction in government spending. The burden on the economy must be relieved at both ends.

In view of the pressure, Bernanke repeated what he already said on Wednesday as well:


“If the recovery were to flash serious signs of backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could cut to zero the interest rate paid to banks on money left at the Fed, although there are some technical difficulties raised by such a move, Bernanke said. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy. “


As we noted before, the idea that what the economy needs is 'more spending' flies into the face of common sense. The severe damage done to the economy's production structure and the pool of real funding by the previous Fed-orchestrated credit boom should have made clear that this method does not work. Even a supporter of Keynesian or Monetarist theory should by now ask himself 'what the hell went wrong when we tried this same tack last time around?'. '

Spending' can never 'grow the economy'. The economy grows only by producing things, not by consuming things. Thus what is required is not more spending, but more saving and investment. Printing money will only distort the economy more on a structural level – precisely what Austrian economists warned that Greenspan's post Nasdaq-bubble policy would in the end wreak. Never mind that they have been proved entirely correct and were the only economists to correctly predict the bust. Whether one has been right or wrong is apparently not a criterion of any importance when it comes to implementing economic policy. Let's rather do the same thing over and over again, only bigger. It has never worked in the past, but this time it surely will!

This, in a word, is institutionalized insanity.


“Rep. David Scott, D-Ga., complained about a lack of "aggressiveness" on the part of the Fed to tackle high unemployment. And, Rep. Gary Peters, D-Mich., wondered why the Fed wasn't taking new steps to stimulate the economy now.”


Print more money already! What the Congressman apparently doesn't realize: printing money can not create one iota of wealth. It is simply not in the power of the central bank to 'create employment', no matter what its statutes say its policy 'should' achieve.


Despite growing threats to the recovery, Bernanke said the Fed continues to believe the economy will grow modestly this year and avoid sliding back into recession. Some disappointing economic data hasn't been bad enough for Fed policymakers to "radically change our outlook," he said.


Here Bernanke confirms what we have been saying all along: as long as there is no in-your-face evidence that the depression continues, the Fed won't do anything just yet. It is reactive, not proactive. If you want to know when the next round of money printing is about to begin, best watch the stock market.



Ben Bernanke: More spending, please!

(Photo credit: Nicholas Kamm / AFP / Getty Images)




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One Response to “Bernanke urges more ‘Stimulus Spending’”

  • xcut:

    Professional politicians want to be seen to be “doing” things, so between two alternative routes, they will choose the more “active”. Especially in the US, where – absent any opposition to the two parties – there is a good chance of getting re-elected by pandering to the supporting base.

    As for the economics, well… the FED may get its forecasts wrong, but so will other people. I am reminded once again why economics is not a science. It would be useful for everybody involved (that includes the proponents of the Austrian school!) to keep remembering this!

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