Bleeding And Purging

…to balance the humors of the economy:

The Keynesian idea of stimulus has no empirical basis, but the only active tool the government has in a time of economic downturn is its ability to borrow and spend. Surprise, surprise: during the Great Depression, governments fell all over themselves to embrace Keynes’s idea of borrowing and spending to “stimulate” the economy. They did so not because it was proven to work (then or since) but because it justified the one action that would make the government larger and more powerful and the political class larger and more powerful as well.

The Fed is now doing the same thing with inflation “Quantitative Easing”. There is no particular reason to believe that inflating the money supply will produce more real economic activity, indeed the history of the 20th century proves exactly the opposite. However, it is all the Fed can do right now so it is going to grab a convenient theory to justify inflating the currency.

For centuries, doctors tortured and killed their patients because neither they nor their patients had the courage to simply admit that there was little good the doctors could do. They created elaborate and detailed theories to justify their counterproductive interventions. Worse, after a time, everyone, doctors, patients, philosophers, proto-scientists, etc. all came to regard the tool driven rationalizations as facts. Not until the discovery of the germ theory of disease, quantitative chemistry and a general science of diagnostics did the nonsense theory of humors fade away. The invention of new tools drove the development of new, scientific theories.

We are doing the same damn thing with the current economic travails. Rather than admit there is little that the government can do to correct its colossal real-estate screwup, we get to witness the economic equivalent of bleeding and induced vomiting all based on a economic theories that have no other reason for existing that to justify the government bleeding and inducing vomiting in the economy.

“… but it’s what can be done,” could well be one of the most dangerous phrases in the English language. In very many cases, not just economics, the best thing to do is nothing. For any particular bad circumstance, there are near infinite number of actions that can make the circumstance worse but only a very few that can make it better. Indeed, there is no natural law that says that every circumstance can be improved with the capabilities at hand. Sometimes a “can do spirit” backfires. Some circumstances are like earthquakes or tornadoes: you can’t stop them, you just have to ride them out.

Don’t just do something; stand there.

25 thoughts on “Bleeding And Purging”

  1. There is no particular reason to believe that inflating the money supply will produce more real economic activity, indeed the history of the 20th century proves exactly the opposite.

    I don’t think this is quite true: inflating the money supply will actually produce more real economic activity in the context of harmful economic legislation that hinders the effective functioning of various markets. Take a minimum wage or universally binding collective wage agreements as an example. In a downturn such policies will lead to massive unemployment. A giant stimulus will create new (partially phony) jobs. This is much less efficient than abolishing the harmful policies, but much more attractive politically. But apart from being less efficient than abolishing stifling legislation it is also immoral: it is a form of legalised macro-economic theft.

  2. When the second $750 billion “stimulus” was being debated, even a number of conservative radio pundits said that “doing something” was better than doing nothing. One in particular likened it to being in a burning building. “In that situation, doing nothing isn’t an option. So it pretty much doesn’t matter what you do, as long as you do something.”

    Throwing buckets of gasoline into the flames is certainly “doing something,” and the effect that would have on the predicament of one trapped in a burning building is pretty much the same as inflating the currency will have on us in our current circumstances.

  3. We may at long last be getting close to the point where more macro-economic theft is no longer more politically expedient than structural reforms because the people being robbed will no longer stand for it. This may be a beneficial side effects of the crumbling state finances in the Eurozone: some of the greatest offenders are being forced to start structural reforms.

  4. The bottom line is that when you have a hammer, everything looks like it needs some punch … disease alone can’t explain why Government go for a law at each problem

  5. “Don’t just stand there, Spock! Do something!”, says Doctor McCoy.

    I marvel how often this happens in real life when the quoted scene illustrates how irrational that kind of thinking. I have also seen it summarized as “ready, shoot, aim!”

  6. There are many things which could be done on a macroeconomic level in an expedient fashion. One would be to tighten consumer credit and increase savings. This can be done by increasing the requirements for making a loan, or hiking the interest rates. Another thing which could be done would be to reduce consumption. This can be done in the US by adding VAT, or instating import tariffs. If I had to pick one of these I would pick VAT. These measures would reduce the credit entropy in the long term. In my opinion dumping more cash in the current system will increase volatility rather than solve the problem. The amount of credits in the system should be proportional to the GDP. I cannot see how increasing the money supply and debasing currencies in a race to the bottom will solve the present issues. It seems like a recipe for hyperinflation to me.

    The measures I mentioned above will increase unemployment and speed up the rate of bank defaults in the short term. So why do it? The answer is they will speed up the rate of transition to the economic equilibrium we are already bound for. In case the banks do default the government should secure the deposits and enter bankruptcy proceedings.

    The reality is a lot of people in the West were living a lavish lifestyle they simply cannot afford. There are people with three houses which switch cars every two years. In contrast in the BRIC countries people are being underpaid. Is it economically realistic for laborers to be producing in 15 minutes a pair of shoes it would take them 8 months of labor to pay and which last 12 months?

    I also think there should be a tax on stock market transactions and the conditions for having a company in the stock market should be relaxed. SOX is a nightmare. The legislation is too complex and the requirements are onerous. This regulation is suffocating nascent businesses.

    I am in favor of infrastructure programs to boost the competitiveness of the market. But parks and baseball fields are not productive infrastructure. How about improving infrastructure in the energy and telecoms sectors instead? Build more power plants and transmission capacity to reduce power failures, deploy wireless broadband nationwide so people can work from any place at any time.

  7. The reality is a lot of people in the West were living a lavish lifestyle they simply cannot afford. There are people with three houses which switch cars every two years.

    They can afford it now because the VAT doesn’t exist here (another bad idea. Thanks, but no thanks.)

  8. Throwing buckets of gasoline into the flames is certainly “doing something,” and the effect that would have on the predicament of one trapped in a burning building is pretty much the same as inflating the currency will have on us in our current circumstances.

    Sometimes the best way to fight a fire is with fire itself. If you scorch the land around the fire in a controlled manner, the fire will have no fuel left to burn and gets extinguished. The problem is how much gasoline you use, and where you use it.

  9. They can afford it now because the VAT doesn’t exist here (another bad idea. Thanks, but no thanks.)

    Fine Ken. Just go bankrupt like the Roman Empire. I am sure the EU can find someone here with a nuclear umbrella to defend us while the US productive and economic fabric tears itself. Just do not expect the Chinese to sell you any more of their cheap drywall, or the Japanese and Germans to sell you any more cars, after you go get yourself bankrupt.

  10. “Sometimes the best way to fight a fire is with fire itself.”

    Remind me to never, ever be in the same burning building with you.

  11. Godzilla, I don’t think you get it. You are saying that government should steer the US economy to go where you think it should go. That’s been done already and is a big part of the reason we have the problems we have. It’s not government’s job to decide that you are living beyond your means and tax in a way that supports that presumption. Nor was it government’s job to help create the circumstances we are currently upset about.

    We don’t need government to support an equilibrium. I doubt that it’s even a good idea to try. This isn’t a control problem like a thermostat. There’s no magical temperature that we know we should set the economy at. My view is that laissez faire is the better policy here with government playing its usual role as ultimate enforcer of contracts and insurer of last resort.

  12. This is the economic equivalent of “Intellegent Design”. Except the believers in the economic version, instead of putting their faith in a deity, believe in the omniscience and omnipotence of people like Bernacke, Geithner and our Community-Organizer-in-Chief.

    Talk about ignorant yokels and their sky-gods.

    “Sometimes the best way to fight a fire is with fire itself.”

    Correct, the point of a backfire is, in the face of an oncoming wildfire, to consume those resources that are going to be destroyed in a “controlled”, “managed” way, and starve the wildfire. It often works, because the sciences involved are quantitative and understood. But when it doesn’t you’ve often end up with a fire more than twice as big as you’d have gotten if you’d left things alone.

    Unfortunately, the economic equivalent is more like randomly spreading around gasoline, striking a match, and then once you’ve got a huge inferno, checking to see if the prevailing winds are favorable. With a “Fire Command” consisting of convicted arsonists and known pyromaniacs.

  13. The problem is how much gasoline you use, and where you use it.

    no the problem is to get rid of needless gov’t regulation. like drilling for oil/gas or building a nuke plant or regulating light bulbs/toilets, et al. you idiot proggs have painted us into a economic corner with your idiot regs and gov’t.

  14. There’s a lot wrong in that paragraph.

    There is not one thing the government can do to stimulate the economy as a whole; there are three. And they’re all very different.

    #1 is monetary stimulus (fooling with the money supply). That’s what the Fed is doing with QE. Without commenting on the ethics of hosing savers, it is very effective. It both “modifies” all loans in the country down some percentage, thus giving every borrower in the country a break. It also lowers the real cost of labor and thus increases employment. It is very effective.

    #2 and #3 are both forms of fiscal stimulus (fooling with tax & spend policies). You get deficit spending and government debt either way, but the forms are different.

    #2 is “tax stimulus.” You keep spending fixed but lower tax rates sufficiently that tax receipts go down. Aka, “the Bush tax cuts.” This is a deficit spending plan, but the government only spends money on things it was going to spend money on anyway (the military, entitlements, etc.). There’s no need for “shovel ready projects” or any of that nonsense because the stimulus is being spent by the taxpayers in their private capacity.

    This is less effective than monetary stimulus, but it does work.

    #3 is spending stimulus. This is the most wasteful form of stimulus, and the one least shown to be effective. It may even (and most likely is) a net loss to the economy. But it’s the most effective as producing political constituencies and kick-backs, so it’s popular with Democrats.

  15. One would be to tighten consumer credit and increase savings. This can be done by increasing the requirements for making a loan, or hiking the interest rates.

    Or by not messing with the bleeping money supply…

  16. If nothing else, inflation will cure the housing crisis. People with underwater homes they couldn’t afford will suddenly be able to afford them with their new inflated salaries. It will also ease the debt crisis.

    In the process, it will screw people (like myself) who played by the rules and who saved cash. It will also screw the countries that we owe money too – and subsequently damage our position in the world market and our position in the world in toto.

    Which means BMWs et al will cost even more and the UAW will be saved. Which makes it pretty much a win win for Democrats.

  17. Brock, you missed number 4: cut spending. This has the advantage of actually working. When spending is cut below revenue, the deficit turns into surplus, which then must be applied to the debt. These spending cuts must be the permanent elimination of programs or even entire departments or agencies.

    We actually tried this in Alberta in the 90s. It worked. Some services formerly provided by the government (such as liquor stores, registries and licensing, among others) were privatized, with the predictable free market results of more employment, better quality service, and lower prices. Some things were eliminated altogether, and they are not missed.

    We also passed a law making it illegal for the province to run a deficit.

    Over the course of twelve years, a province of 3 million people wiped out a $23 billion provincial debt by cutting spending. Premier Ralph Klein was elected on the promise to cut the government and eliminate the debt, and while he was cutting away his approval ratings were in the mid 80s. So not only does it work, it also gets politicians who promise it and then follow through reelected.

  18. The Politician’s Sylogism

    1) We must do something
    2) This is something
    3) Therefore we must do this

    Read/watch “Yes Minister” & “Yes Prime Minister” – as Sherlock Holmes obscure, it has all been done before…..

  19. Fighting fire with fire is known as a backfire. Backfire has an interesting connotation, doesn’t it?

    Just go bankrupt like the Roman Empire.

    We could if we allow these morons to remain in control. Thinking that Americans are not taxed enough (so a VAT becomes a good [shudder] idea) is completely, absolutely and totally wrong. What we have, like the Romans, is a bread and circus problem because we’ve allowed the political class too much power. We need to cut there legs out from under them. Repealing the amendment that allowed the income tax would be a good start. Then the feds have to deal directly with the states rather than citizens which are given no standing in the courts.

  20. Remind me to never, ever be in the same burning building with you.

    When there is a fire the first thing is to make sure you get everyone out of the danger zone. Then you work out how to control the fire. Which is why I said secure the deposits and let the banks which got addicted to toxic assets go bankrupt.

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