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Five Things You Need to Know: "Economists" Embrace Government Spending


But all talk of economic stimulus is moot if the psychology of deflation has taken hold.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

Economists Embrace Government Spending

The headline on the homepage of the New York Times is grim, and almost speaks for itself:

$1.2 Trillion Deficit Forecast as Obama Weighs Options

But, hey, so what? The "economists" are beyond the point of caring about massive government expenditures, at least according to the Times in a separate article: "We have spent so many years thinking that discretionary fiscal policy was a bad idea, that we have not figured out the right things to do to cure a recession that is scaring all of us," Alan J. Auerbach, an economist at the University of California, Berkeley, told the newspaper.

The Federal Reserve, naturally, is elated about "the new enthusiasm" for government spending. In fact, San Francisco Federal Reserve President Janet Yellen, speaking at the annual American Economic Association meeting, said exactly that: "The new enthusiasm for fiscal stimulus, and particularly government spending, represents a huge evolution in mainstream thinking."

Just Who Are These "Economists" Anyway?

Hold on a moment. Let's go back to the "economists." The Times article paints economists as in near universal agreement on massive coordinated fiscal and monetary policy to end a "bad recession":

"The few sessions that dealt with fiscal policy were packed with economists, mostly from academia. Nearly all argued that public spending can be more effective than tax cuts in getting out of a bad recession. Still, they said the present crisis required, as a tonic, a mix of the two..."

While it may be true that "all economists" at the annual meeting of the American Economic Association favor drastic public spending measures to end a "bad recession," it is hardly true that "all economists" everywhere favor this kind of spending.

Not ALL Economists Agree

The Times article completely ignores an entire school of economic thought:

All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production.
- Ludwig von Mises, The Causes of the Economic Crisis

Of course, ignoring the Austrian school makes sense in this day and age. Ludwig von Mises certainly discovered there is no popularity gained from being right about economic doom. Being "right" about doom is the quickest way to create more enemies than you can shake a stick at.

That really is the only way to explain why, today, the very people in charge of driving the global economy over the cliff - global central banks and Keynesian economists - are now charged with "rescuing" it from its death dive.

Unfortunately, I'm afraid there's only so much more "rescue" we can take.

Obama-Biden Rescue Plan

Meanwhile, if you are interested in seeing how it's possible for even the Keynesians to be disappointed in massive government intervention, check out the Obama-Biden Plan draft here (pdf file).

Although the plan promises to spend upwards of $700 billion, a closer look at the details reveals that the "stimulus" is largely smoke and mirrors. By that I mean that there is barely a fraction of direct stimulus into the economy in the plan, the kind that Keynesians would say is necessary to stave off a deep, prolonged recession. Regardless of whether one believes an economic stimulus plan is the right course of action, the plan will be viewed as a deep disappointment in the current iteration.

Psychology of Deflation

Of course, all of this talk of economic stimulus is moot if the psychology of deflation has taken hold, a psychological state where dollars are saved in anticipation of ever lower prices. A state of mind kind of like, this:

""Forty to 50 percent [discounts] used to excite me," the 43-year-old writer said. "Now, I want at least 70 percent." Turner says she has taken advantage of 75 percent discounts on children's clothes in recent weeks and is willing to wait to get the same type of deals in the coming months."
"Stores Worry Holiday Sales May Be Permanent" - MSNBC

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