Friday, September 9, 2011

Which Economists Show Support for Obama's Plan?

Today there was an article by Derek Kravitz on the AP which was entitled as "Economists Show Support for Obama Job-Growth Plan".  Now which economists are those?  Well, he quotes Mark Zandi of Moody's Analytics, Allen Sinai, chief economist of Decision Economics, Susan Wachter, a finance professor at the University of Pennsylvania's Wharton School, Michael Mandel, chief economic strategist for the Progressive Policy Institute, Paul Ashworth, chief U.S. economist at Capital Economics and Menzie Chinn, an economist at the University of Wisconsin.  (Personally, I have only heard of Zandi before and I think he usually has it wrong.)  Amazingly they say that more stimulus is what is needed.  Well, maybe not Mandel.  (Kravitz is not very clear on this point.)  And Ashworth says that people might just save it instead of running out and spend, spend, spending it.  (How horrible!)  However, as we see by the article's title, the whole point is to show how much economists love Obama's plan.  In fact, Chinn says that the plan doesn't go far enough.

Here's the commonality: they are all locked into the formula GDP = C + I + G + (X-M).  In other words, the size of the economy is equal to Consumption + Government Spending + Investment + Net Exports.  Of these components, they rightly see that consumption is by far the largest. 

The only problem with this approach of looking at the macroeconomy is that it is completely wrong

GDP is defined as the summation of all final goods and services in an economy over a certain period of time, usually a quarter or a year.  Only final goods and services are counted because we do not want to double count.  In other words, when we make a table, we don't want to count the table when we chop down the tree, and count it again when we turn it into boards, and again when we construct the table and then again when it goes to the wholesalers, and so on.  It's one table and we only want to count the one table once.  Fine.  That makes perfect sense; however most economic activity does not take place at the final stages of production.  That's the "Do you want fries with that?" stage.  Most people and most economic activity are not there. 

So what is a better approach?  The Austrian Approach is, by far, better.

We need to disaggregate the Capital Structure--The Structure of Production.  Only by viewing the economy as a process of production can we get an idea of how the economy works, and more importantly, how it grows.

The economy does not grow because people simply "demand" stuff.  Think about it.  Do you demand more than your parents, or grandparents, or people who lived 1,000 years ago?  Are we rich in the US because we simply want things more than those who came before us?  Ridiculous!  So, if it isn't demand that has caused us to be wealthy, then it must be that other thing that economists talk about--supply.

Yes, it is supply that allows us to be wealthy.  Now, let's pause as before and think about this point too.  Could it possibly be that more stuff is what allows us to have more stuff?  Duh!  Yes of course it is.  Supply has always been the limiting factor, not demand.  Thus, we need to focus our attention on production. 

In order to get out of these economic doldrums, we need to produce more.  It is only through production that we will be able to grow.  So how do we grow when starting from a depressed economy?  We need to let the costs of production fall.  We need to stop propping up prices and let them fall.  As input prices (yes, this includes wages) fall, profitability will rise.  As profitability rises, there will be more economic activity from both existing companies and new rivals.

The bottom line is that the business sector needs to cut its costs.  We could let input prices fall (commodity prices are still fairly high); we could let nominal wage rates fall; and we could reduce the costs of keeping up with rules and regulations.  Additionally, imagine how much productive energy would be released if we simply abolished the corporate income tax.  All those wasted hours converted into productive activity.  A zero corporate income tax would attract capital from all over the world to the US.  The first country to do this will be the big winner and then other countries will have to do the same to remain competitive.  Instead of implementing Frank-Dodd and ObamaCare, we should repeal these and even more regulatory burdens.  What a boon to business and the economy!  Production will grow and with it, the economy. 

And remember, consumption, jobs and prosperity are a consequence of production, they are not the reason for it.


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