House of Eratosthenes

Dr. Christina Romer’s economic speech today, marking her last speech as an administration official, is an admission that the fiscal stimulus package that she helped craft has failed.

Calling the economic recovery “insufficient”, she noted that a 0.6% drop in the unemployment rate still leaves unemployment unbearably high. “Real GDP is growing, but not fast enough to create the hundreds of thousands of jobs each month that we need to return employment to its pre-crisis levels,” she said.

The Obama administration’s fiscal stimulus was meant to boost aggregate demand and get the economy going again. Estimates of GDP show that the United States is still 6% under its pre-crash trend, and that her plan hasn’t worked as expected.

“The United States still faces a substantial shortfall in aggregate demand… this shortfall in demand, rather than structural changes in the composition of our output… is the fundamental cause of our continued high unemployment,” Romer told the crowd at the National Press Club in Washington, D.C.

Keynesian economics have been tried often and succeeded seldom-to-never. There is no logical underpinning by which they can work — think back to Winston Churchill’s quote about the man sitting in the bucket and lifting himself by the handle.

The merit to the theory is purely psychological. As Romer herself says,

While we’d all like to find the inexpensive, magic bullet to our economic troubles, the truth is, it almost surely doesn’t exist. The only surefire way for policy makers to increase aggregate demand in the short-run is for the government to spend more and tax less.

She got it half right.

We keep falling for this because we have a psychological need for some, as Romer said, “magic bullet.” We want to push one button, pull a sword from a stone, crush the witch under a house, and have everything be all better.

That, and we really aren’t in agreement about what needs to be done to save the economy because we aren’t in agreement about what an “economy” is. If you produce a good or service for your daily bread, you figure it’s your job to create wealth that did not exist before and the “economy” is the sum total of lots of people engaged in that effort. “Economy,” therefore, is an attempt. It is production throughput, hour by hour and day by day.

Other people see it a different way. If you’re someone who works but doesn’t produce anything through that work that didn’t exist before, you’re a non-producer and you’re going to be motivated to see that word differently. You make your living moving cash around, and you’re going to see the word as describing a state of liquidity. Maneuverability.

So if the problem is described thusly: Businesses have capital, businesses want to produce more, but they aren’t hiring because they’d rather figure out how to enhance the output without hiring anybody. Then — to a non-producer, the problem has everything to do with business’ reluctance to hire people, and nothing to do with the output. Get the people hired and the economy is “fixed.”

To a producer, especially one looking for a job, the question is going to be “once I/we/they manage to snag a job, how long is that job gonna last?” We live in a world in which a job isn’t a job if it’s just a temporary allowance to “free” money that’s going to trickle out in a few months when some program comes to an end.

Conclusion — and it is inescapable: The wrong people are in charge. They will not see this as a problem involving producers being obstructed, who require the obstructions to be moved. They earn a sort of “livelihood” that makes it tough for them to catch on to this. When they identify the problem of healing the economy, they think their job becomes one of increasing mobility of the cash, making it more easily moved from one entity to the next. They think that’s the mission.

And when it’s pointed out to them that this hasn’t worked — like, ever — their diagnosis of what was wrong, is that the wrong people were doing it. Now that we have new people who are wonderful, it’ll work and all we have to do is give it another go.

They will not change their minds about this. Ever. They are invulnerable to new evidence.

At the bottom, the problem is that, for the people now In Charge, “production” is something they “understand” in the same sense a tribal shaman did.

That is, they have no apprehension, let alone comprehension, of “production” as a process. It’s something that just happens, like lightning strikes or volcanoes. From experience, they know “money” has something to do with it. The shaman knew that “dead animals” had something to do with the food supply, so to him it made sense to sacrifice a goat to the gods to stimulate additional nutrition. If they sacrifice enough money to the gods of finance, the bunch running things figure, it’s sure to get better.

Regards,
Ric
- Ric Locke | 09/02/2010 @ 16:40
Keynesian solutions are akin to priming the pump and without pumping, expecting water to flow. The real solution is to prime and pump and drill more wells.
- Deanies-Papa | 09/03/2010 @ 05:55
*sigh*
But…but…that’s only because REAL socialism hasn’t ever been tried by REAL men.
Let’s you and him do it again, I just KNOW that the results will be different THIS time.
C’mon Charlie Brown, kick the football for me. I SWEAR that you won’t end up on your back THIS time.
- CaptDMO | 09/03/2010 @ 10:40

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Romer’s Keynesian Economic Stimulus Plan FailedThursday, September 2nd, 2010

Romer’s Keynesian Economic Stimulus Plan Failed
Thursday, September 2nd, 2010