Long Term Consequences of Short Term Thinking

Greetings from Sedona…

Occasionally I take some time to think about which people have had the greatest impacts on humanity – for both good and evil.  As I have aged and hopefully learned a bit here and there, the parameters I use have changed.  The result is that my choices tend to come at right angles to most folks.  John Maynard Keynes is a case in point.

Lord Keynes certainly intended no harm, unlike the usual villains of history, yet his ideas surpass nearly all of them in the devastation and human misery they have caused.  The key Keynesian idea is that the market economy has an inherent flaw.  There is a leakage from the system in the form of excessive savings.  This, he felt, was a major cause of the great depression.  Therefore, government would be needed on a regular basis to create consumer demand (purchasing) by deficit spending in order to offset flagging consumer demand and excess savings.  This idea lies at the root of the economic tidal wave of misery spreading around the world today, causing untold death and destruction in its wake.

The counterpoint to Keynes is the Austrian school of economics lead by Ludwig von Mises.  Austrian school theory says that saving, not spending is the driver of prosperity and growth.   Deficit spending alone will have negligible impact on increasing consumer demand (if any at all).  In order to increase consumer demand deficit spending must be financed by the monetary authority’s printing press.  That is exactly the path taken by virtually the entire world over the last seven decades.    Fortunately we live in one of those rare moments of history where the evidence is in and ready to be examined.

We have implemented Keynesian theory with gusto over the last seventy years.  At every opportunity our power elites have used government to support consumer spending.  The chart on the right, below, shows government social benefits payments as a percentage of personal consumption.

The next chart shows government transfer payments of all types as a percentage of disposable income.

Clearly, Keynes’ ideas rule regardless of party or political persuasion.  The last few years have seen government supported consumer demand ratchet well into record territory.

The charts above start only four decades ago, but the rising trend began, in earnest, with Herbert Hoover.  So, what are the results?  Our economy has certainly grown over the decades.  The charts above also show that government actively supported consumer spending at a persistently rising rate.  We would therefore expect that consumer spending would show a similar pattern.  That is exactly what happened, but with surprising results if you are a Keynesian.

The next chart shows consumer spending as a percentage of our GDP in the top panel and the ten year growth rate on the bottom panel.

In case there is still any doubt about the relationship between growth and the implementation of juicing demand Keynesian style, the next chart does the same set of calculations – this time using the savings rate instead of the spending rate.

These last two charts are particularly powerful because they take a truly long term perspective.  We, especially the political and financial classes, tend to get wrapped up in the minutia of the latest information without ever stepping back to look at the picture the data paints.  The GDP growth rates for the charts above are for ten year periods.

We are so used to looking at one year returns that it may take a few moments for this all to sink in.  Keynes once said that “The long run is a misleading guide to current affairs.  In the long run we are all dead.” While we are all certainly dead in the long run, I am being kind when saying the rest of his statement is stupid!  Keynes is long dead and we live to see the long run consequences of his ideas.  You and I may not be suffering much here in America, but the consequences for people in poorer regions of the world are dire, including death.

This all makes sense, even without being steeped in economic theory.  We become better off economically only when we become more productive.  Our standard of living rises only if we can produce more goods and services better and faster.  That is, our productivity must increase.  Saving is one of the key components for increasing future productivity.  Spending is prosperity’s payoff, not its cause.

Long Term Consequences of Immoral Foreign Policy

Utterly amoral power brokers like Henry Kissinger advise letting crooked thugs like Hosni Mubarak exit with dignity.  Not to do so would supposedly send the wrong message to our allies around the world.  This is an unspeakably grotesque notion, and the oppressed around the world hate us for it.  This relates to the economics content of my weekly posts because this all costs us lots of money.

Mubarak  has been in power for nearly thirty years.   The low estimate of his wealth is $40billion!!!!!!! Today we send Egypt about $2billion per year.  Thirty years ago this number would have been much lower because of how we destroy our currency through inflation.  This mean every single American taxpayer dollar sent to Egypt for the last thirty years has gone directly into the pocket of an oppressive, crooked thug.  None of this accounts for the additional $billions he, his family and crooked friends have spent over that period.

We like to think of the United States of America as the beacon of liberty across the globe.  In truth we have become the main instrument of oppression on our planet.   For many decades we have been financially and militarily supporting the worst excuses for human beings ever imagined.  Sure, we can make mistakes, but you cannot believe that after a few years we did not know that Mubarek was stealing from us and sucking the economic life blood from the Egyptian people.  Yet we keep sending cash to him and dozens of others like him, or worse.  This has been going on for so long that it blankets both parties and all political policy labels of those in power.

It is a sad thing to observe that America has become an empty shell of vacuous rhetoric.  Our leaders are shameless hypocrites, clueless about the meaning of liberty (or both).  The libertarian position on this issue is that we do not go around the globe forcibly deposing bad, dictatorial rulers.  We also do not send crooks cash.  Right now I know of only one house member and one senator who embrace this position.  The one other possible senator is, ironically, a socialist.

All the best to you all,

Stephen Reiss

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