An old (wrong) recipe: we all want to be consumers

I should start with an apology; it’s been far too long since my last post and I haven’t attended this blog as I would have liked. There have been so many things happening around in money and central banking that I will certainly need some time to catch up. I hope the patient readers of this blog find the forthcoming entries worthy of their time.

Last Autumn I was kindly invited to attend a very interesting seminar organised by the Institute of Economic Affairs (IEA) at its headquarters in London, and chaired by S. Davies; the topic was the so-called ‘stagnation hypothesis’, recently popularised by L. Summers at the 14th IMF Research Conference. Interesting as it was I am not going to write on it today but rather on a poem (that I must confess I hadn’t read at the time) a colleague of mine at the University of Buckingham (Malcolm Rees) brought to our attention. While we were in the midst of the discussion about the best way to tackle the slow (hypothetically secular) growth of the developed economies, Malcolm used his turn to read aloud a poem written in 1934 by Patrick Barrington, ‘I want to be a consumer’, which you will find below. Following the recipes of those economists supporting the underconsumption theory back in the 1930s, of course very well-known and popular well before the publication of Keynes’ General Theory, the poem summarises the views of a boy willing to consume more for the good of the economy as a whole. Then and now we all hear these young (and not so young) ‘lads’ encouraging us all to borrow more money and simply spend or even better asking the government to do so in our own interest, so the magical multiplier of spending operates the needed miracle. I am afraid this old recipe is quite short-sighted: as the brilliant (and austere) Catalan writer (Josep Pla) famously asked in 1954 during his visit to New York and saw all the lights displayed everywhere in the city, ‘and this, who pays for it?’. Even more, if adopted as a systematic policy, will this pattern of more and more spending be sustainable? And who works and saves more so we can increase production on long term basis? Well, I guess the answers to all these questions are only implicit in the poem and I am sure the readers of this blog will certainly know that these tricky questions are not so easy to answer; but indeed essential to bear in mind so perhaps we can avoid the same policy mistakes that have brought us to the chaotic economic situation where we are still in.

Juan E. Castaneda

PS. I am afraid ‘the old lady’ is back.

‘I Want to be a Consumer’

(by Patrick Barrington. Originally published in Punch, 25th April 1934. Text taken from the blog StudyofEconomics.wordpress.com)

“And what do you mean to be?”
The kind old Bishop said
As he took the boy on his ample knee
And patted his curly head.
“We should all of us choose a calling
To help Society’s plan;
Then what do you mean to be, my boy,
When you grow to be a man?”

“I want to be a Consumer,”
The bright-haired lad replied
As he gazed up into the Bishop’s face
In innocence open-eyed.
“I’ve never had aims of a selfish sort,
For that, as I know, is wrong.
I want to be a Consumer, Sir,
And help the world along.

“I want to be a Consumer
And work both night and day,
For that is the thing that’s needed most,
I’ve heard Economists say,
I won’t just be a Producer,
Like Bobby and James and John;
I want to be a Consumer, Sir,
And help the nation on.”

“But what do you want to be?”
The Bishop said again,
“For we all of us have to work,” said he,
“As must, I think, be plain.
Are you thinking of studying medicine
Or taking a Bar exam?”
“Why, no!” the bright-haired lad replied
As he helped himself to jam.

“I want to be a Consumer
And live in a useful way;
For that is the thing that’s needed most,
I’ve heard Economists say.
There are too many people working
And too many things are made.
I want to be a Consumer, Sir,
And help to further Trade.

“I want to be a Consumer
And do my duty well;
For that is the thing that’s needed most,
I’ve heard Economists tell.
I’ve made up my mind,” the lad was heard,
As he lit a cigar, to say;
“I want to be a Consumer, Sir,
And I want to begin today.”

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A plea for good economics: Pedro Schwartz vs Paul Krugman

(Originally published in GoldMoney Research, 18th July 2012)

 

“The trouble with some Nobel Prize-winners is that they are tempted to pontificate on matters outside the speciality in which they have excelled. When Professor Krugman expatiates on macroeconomics, he tends to oversimplify complicated questions of theory and policy, and to misrepresent crucial periods of the past, all to suit his political pre-conceptions”.

These were part of Professor Pedro Schwartz’s opening words in his critical comment on Paul Krugman’s presentation of his new book in Madrid (End This Depression Now!, Norton ed. 2012). As Krugman’s book title suggests, we are going through one of the worst economic crises since the 1930s Great Depression. But does this mean, as Krugman argues, that more government intervention in the economy is the solution?

Following his own rationale (see video, minutes 10-30), it is as if we are faced with an easy choice: do we want to overcome the crisis with expansionary demand policies at the cost of a little more inflation? Or do we prefer instead painful austerity measures that condemn us to a long recessive and stagnated economy, but not much inflation? Well, the answer is easy then. Let’s have some inflation!

During the so-called Keynesian years of the 1950s and 1960s, we were told that there was a trade-off between inflation and unemployment, that is, easy money promotes employment while hard money does the opposite. Yes, those were the years of the traditional Phillips Curve. But the recession and inflation that accompanied the oil crises in the 1970s and the stagflation of that decade – the dreaded combination of high unemployment and high inflation – showed that inflation is, after all, a monetary phenomenon; in other words the result of excessive money creation. Regardless of past evidence, Krugman keeps on saying that fiscal and monetary expansion is the only way to fill the gap left by the bursting of the housing bubbles in countries like Spain. In addition, he supports this inflationary policy mix as it would result in an improvement of the economy’s competitiveness, as it would be a feasible way to cut real wages and prices. Throw in a call for increased financial regulation, and et voila: the neo-Keynesian brew is complete.

Professor Schwartz’s intervention (see video here, minutes 35-48) was a blessing. He refuted Krugman’s recipes and rejected the expansion of aggregate demand as an effective way to address the current recession. As he remarked, were not expansionary fiscal and monetary expansionary policies large contributors to the present crisis? How then are they going to be the solution now? As Menger pointed out many years ago, economics must deal with the unintended consequences of human decisions; so a good economist must not be tempted to just please the public with popular solutions. He must be prepared to stick his neck out in favour of difficult decisions. I fully share Professor Schwartz’s views and think that more spending would be myopic and counterproductive in the long term. We have learnt painfully in the past that increased public deficits financed by a loose monetary policy is neither an effective nor a sustainable long-term solution to such crises.

Juan Castañeda

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