Wednesday, March 20, 2013

Consuming Our Way to Prosperity is Macro Folly, by John Papola (originally posted 3/6/13)

Originally posted March 6, 2013 (changed web hosts and back ups only through 2/28 were transferred)

Here’s a snippet from an excellent piece by John Papola.  Be sure to read  (it begins below the video):
Good macroeconomics should be focused on this coordination among value-adding producers and be on the lookout for financial disruptions and mismatches between the supply and demand for their medium of exchange: money itself.  This has been the classical focus of macroeconomics from David Hume and John Stuart Mill through Friedrich Hayek and Milton Friedman.

For most of human history, ordinary people had to spend their lives growing food.  Today, we have many billions more people on the planet.  And yet food is cheaper, better and of greater variety than ever before.  Still, almost nobody works in agriculture . We didn’t create this wealthy, amazing world by eating.  We did it by saving our seed corn, investing and ultimately inventing our way out of farming jobs. Thank heavens we did.

There are important lessons for public policy that come from these classical insights.  Any program which accelerates the consumption of value, or worse, the destruction of value, ultimately make our society poorer.  Despite what Keynes and his modern followers claim, wars, natural disasters, terrorist attacks, faked alien invasions or programs that encourage us to destroy our used cars — all make us poorer. These schemes reduce the amount of valuable goods and services available for society.

Some may consider unemployment benefits to be a necessary policy on humanitarian grounds, but they by no means “stimulate” the economy.  The recipient, after all, is consuming without producing any value for others.  Disincentives for people to be productive, which have exploded in recent years, not only reduce employment, but reduce output and growth as well.  This last point used to be widely believed by economists, including the immensely popular and polarizing economist, Paul Krugman, whose own 2009 textbook blamed extended unemployment benefits as one of the main reasons for decades of European stagnation and high “structural” unemployment. Now, I fear that a decade of Keynesian macro follies has brought Euro-sclerosis to America.

Savings and investment are the true engines of economic growth.  When successful, they increase the total amount of valuable goods and services for people to enjoy.  They build a better mousetrap and allow us to do more with less.  A growing economy is a growing supply of goods and services being exchanged between productive people.



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