Power & Market
Or at least be treated with considerable skepticism by anyone with a rudimentary knowledge of economic affairs.
Apparently financial journalists aren’t very familiar with real-world evidence.
Here are some excerpts from a news report in the Wall Street Journal.
The economy was supposed to get a lift this year from higher government spending enacted in 2018, but so far much of that stimulus hasn’t shown up, puzzling economists. Federal dollars contributed significantly less to gross domestic product in early 2019 than what economic forecasters had predicted after Congress reached a two-year budget deal to boost government spending. …Spending by consumers and businesses are the most important drivers of economic growth, but in recent years, government outlays have played a bigger role in supporting the economy.
The lack of “stimulus” wasn’t puzzling to all economists, just the ones who still believe in the perpetual motion machine of Keynesian economics.
Maybe the reporter, Kate Davidson, should have made a few more phone calls. Especially, for instance, to the people who correctly analyzed the failure of Obama’s so-called stimulus.
With any luck, she would have learned not to put the cart before the horse. Spending by consumers and businesses is a consequence of a strong economy, not a “driver.”
Another problem with the article is that she also falls for the fallacy of GDP statistics.
Economists are now wondering whether government spending will catch up to boost the economy later in the year… If government spending were to catch up in the second quarter, it would add 1.6 percentage points to GDP growth that quarter. …The 2018 bipartisan budget deal provided nearly $300 billion more for federal spending in fiscal years 2018 and 2019 above spending limits set in 2011.
The government’s numbers for gross domestic product are a measure of how national income is allocated.
If more of our income is diverted to Washington, that doesn’t mean there’s more of it. It simply means that less of our income is available for private uses.
That’s why gross domestic income is a preferable number. It shows the ways – wages and salaries, small business income, corporate profits, etc – that we earn our national income.
Last but not least, I can’t resist commenting on these two additional sentences, both of which cry out for correction.
Most economists expect separate stimulus provided by the 2017 tax cuts to continue fading this year. …And they must raise the federal borrowing limit this fall to avoid defaulting on the government’s debt.
Ms. Davidson applied misguided Keynesian analysis to the 2017 tax cut.
The accurate way to analyze changes in tax policy is to measure changes in marginal tax rates on productive behavior. Using that correct approach, the pro-growth impact grows over time rather than dissipating.
And she also applied misguided analysis to the upcoming vote over the debt limit.
If the limit isn’t increased, the government is forced to immediately operate on a money-in/money-out basis (i.e. a balanced budget requirement). But since revenues are far greater than interest payments on the debt, there would be plenty of revenue available to fulfill obligations to bondholders. A default would only occur if the Treasury Department deliberately made that choice.
Needless to say, that ain’t gonna happen.
The bottom line is that – at best – Keynesian spending can temporarily boost a nation’s level of consumption, but economic policy should instead focus on increasing production and income.
P.S. If you want to enjoy some Keynesian-themed humor, click here.
P.P.S. If you’re a glutton for punishment, you can watch my 11-year old video on Keynesian economics.
P.P.P.S. Sadly, the article was completely correct about the huge spending increases that Trump and Congress approved when the spending caps were busted (again) in 2018.
Originally published at International Liberty
This weekend's historic meeting between the leaders of North and South Korea offered hope for a peaceful resolution to a conflict that has gone on for over 60 years. Of course peaceful rhetoric and photo-ops can only go so far, and numerous commentators with experience in North Korea - including our Michael Malice - have expressed skepticism at the notion that a true diplomatic solution can ever be reached with Kim Jong-un.
I was curious to hear from Korean friends who not only grew up under the cloud of potential North Korean aggression, but are highly skeptical of their own government. How much faith did they place in recent developments?
William Park, an economics PhD student at the University of Missouri, Mises U alumnus, and Senior Advisor at Students for Liberty:
Personally, it was a good starting point to make a permanent peace in the Korean peninsula. I don’t know whether the dictator, Kim Jong-un would keep his promise, but at least, starting communication and interaction is good for each country. When the interaction is enlarged and North Korea opens their border and market, then mutual benefits will get rid of the possibility of war.
When I talked to some Korean libertarians about this issues, some people look positive about the treaty, but other people were very suspicious about the action between the dictator and Korean president, Moon Jae-in because the former liberal president, Kim Dae-jung used a meeting as a political tool. After the meeting with the former North Korean dictator, Kim Jong-il in 2000, he became very popular among Koreans and won the Nobel Peace Prize. However, he aided to the North Korean government, and it means that he used taxpayer money. Also, he failed to make North Korea open their borders. People think that it failed to make North Koreans know what capitalism is and freedom is, but just help the North Korean government survive by providing money and resources.
However, almost all libertarians (except fake libertarians) agree that the direction of foreign policy of South Korean government is a right way and hope that it would make a permanent peace. Plus, it’s just a beginning period, so we think we need to wait until the North Korean dictator do a credible action such as no provocation.
In other words, we think we need to wait to discern whether it is just a political action to increase popularity in both countries or a genuine treaty.
As another student noted, peace in Korea requires more than just a political agreement, it also requires trade between the 38 parrallel north.
Allen Jeon, President of Students for Liberty Korea
This is very encouraging because they made “end of war” and “removal nuclear weapon” declaration. However, there are also concerns. In the past, the North Korean regime has destroyed the agreements and declarations eight times. So there is still a possibility that they can override the declaration at any time. But I don't think it's necessary to be overly pessimistic and necessary to be overly optimistic Because no one can predict the future...
What I personally wonder is what kind of transactions have been made between Trump and Kim Jong-un....We live in an unhappy world where we have to rely on the decisions of a few people.
...To maintain peace on the Korean Peninsula, the government must carry out its non-interventionist foreign policy And we must reduce the possibility of war through free trade and free market. Mises and Kant said free trade brings “peace” and reduces “the possibility of war.”
Another member of Students for Liberty Korea student is optimistic that a diplomatic agreement reduces the hope for a larger, unified Korean government, but hopes to see a peace agreement bring an end to South Korea's mandated military service:
I welcome peace treaty with North Korea. The peace treaty will remove opportunities for Korean Reunification. I don't want our government reunify with North Korea and become bigger.
But I also think if conscription in South Korea stays, the peace treaty is meaningless.
Hopefully we will see the peace process continue on the Korean peninsula.
We're also very excited for the growing Austro-libertarian movement in the South, with Korean translations being provided by the great team at Mises.Kr.