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Gerard Jackson
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I worked as an independent economic consultant before I retired. My economic opinions were sought out by those who had heard that my use of Austrian economic analysis had resulted in some very accurate predictions. Unfortunately, the number of Austrian economists in Australia can be counted on... More
  • Obama's economic policies are turning into a global disaster

    America — like every other country — has had its inept economic managers. No political party has a monopoly of economic incompetence. But without a doubt Obama and his crew are rapidly shaping up to be the biggest bunch of incompetent economic managers since the 1930s, irrespective of what yelping leftwing historians assert. And I do include Bernanke, Geithner and the rest of those economic geniuses. (The idea that Bernanke is some kind of expert on the Great Depression is an absolute joke.)

    Obama's leftwing obsession with permanently expanding the size of government, now matter how much it damages living standards, is deepening and prolonging this recession. In fact, given the official unemployment rate of 10.2 per cent (it translates into 17 to 20 per cent if we include short-time working, discouraged workers and part-time workers who want a full time job), which looks to rise even further, I think it's safe to say that the US has now moved from being in recession to being in a depression.

    What is the Obama's solution? More regulations and more taxation. What a genius. The capital gains tax is set to leap by 69 per cent, all the Bush tax cuts — and I do mean all — are going to be repealed, massive spending programs are in the pipeline, the deficit is exploding along with debt, and the most irresponsible and financially reckless Congress in American history is trying to dream up new ways to extract even more money from the hapless public. Believe you me, Americans have seen nothing yet. (Bernie Madoff must be wondering why his fellow Democrats are not sharing his cell block with him.) The costs of this economic lunacy — if left unchecked — will be a permanently sluggish economy, if not outright stagnation, plus a higher rate of lasting unemployment

    Americans will not be the only ones to suffer. The intellectually scintillating Bernanke, Geithner and their galere of economic hanger-ons have hit on the brilliant scheme of trying to export America's unemployment by depreciating the dollar. (In the 1920s and '30s this was called "exchange dumping".) If you print enough dollars you will eventually force down the exchange rate.

    Foreigners only have to look at Obama's spending to realize that there is no way taxation can pay for it. Moreover, the sheer scale of the Democrats' profligacy rules out sufficient borrowing. This leaves only the printing press. However, this raises a problems for those pesky foreigners. If they allow the dollar to slide then it will hit their export industries. Fewer exports means more unemployment. This they would not like. They might decide that depreciating the US dollar was a sneaky way of raising tariffs — and they would be right. (Americans shouldn't get the daft idea that a cheaper dollar won't affect their standard of living.) This would explain why Asian countries have been buying dollars. It's an attempt to protect their exports. But they know Ol' Bernanke can churn out them dollars faster than they can buy 'em. Hello, suckers.

    Another problem is that some Asian countries have unofficially pegged their currencies to the dollar. What this means is that for every dollar that enters the country the central bank must print the equivalent in the local currency. Bernanke's monetary policy has led foreigners to borrow US dollars at a ludicrously low interest rate. They then use these dollars to speculate at home. Liquidity (a fancy name for the money supply) expands, fueling speculation in shares and real estate. Brilliant. Unable to spark a boom at home Bernanke and his fellow economic mountebanks help trigger one in Asia.

    Nevertheless, these foreigners have nothing to worry about. Honest Tim Geithner — the man who cheated on his taxes and was then given a clean slate — assured them that he really, really, really does believe in a "strong dollar" and even "market oriented exchange rates"*. So their concerns about the incredible shrinking dollar are totally misplaced because anybody who is anybody just knows Honest Tim would never tell a fib.

    "Market oriented exchange rates" is a weasel phrase when uttered by someone like Geithner. It says nothing about whether Bernanke will continue to debase the dollar, only that it will be sold at the going rate, which will get lower and lower as the printing presses work overtime. Bernanke and Geithner are using inflation to raise US exports and curb imports. The result will be to further distort the pattern of international trade and perhaps even spark a trade war. And for what? To try and save the Democrats' political skins and their destructive economic policies.

    A country can no more devalue its way to prosperity then it can spend its way into solvency. The combined effect of Obama's economic policies will be lower real wages, which means a lower standard of living for Amreicans. But look on the bright side: Buffett will still be fabulously rich as will be all those super rich Hollywood Democrats. For them the American Dream will continue

    *The question of exchange rates is not a straightforward one. See Will the exchange rate kill manufacturing

    Gerard Jackson is Brookesnews' economics editor

    Nov 24 5:16 AM | Link | Comment!
  • A rejoinder: Why cap and trade will devastate the US economy

    My last article on Obama's energy policy (Cap and trade would sink the US economy and permanently change the political landscape) certainly provoked an angry response from the green energy brigade. Now experience has taught me the futility of trying to reason with those who dogmatically cling to ill-informed opinions. Nevertheless, considering the extreme importance of this issue it is pretty clear that the nonsense that is being dished up in defense of Obama's energy policy needs to be refuted. I don't imagine for one moment that my critics are open to a closely reasoned argument. Hence this response is for those who prefer facts and reason to green dogma.

    The first thing I noted is that all of the criticism was completely void of economic reasoning. It seems that for these people economics really doesn't matter, particularly if its conclusions run counter to green dogma. Secondly, I was left wondering in some cases whether the critic had actually read the article. My third observation was the tendency of some critics to rely entirely on logical fallacies.

    One line of attack is that mine is an old and tired argument that was discredited by the clean air acts. Therefore, as these acts did not hurt American industry then neither will Obama's energy policy. This is a non sequitur. It does not follow that because these acts allegedly had no detrimental effect on industry and therefore living standards Obama's energy policy will not damage the US economy. Moreover, it simply is not true that stringent environmental controls did not have damaging consequences. Like it or not, environmental regulations are not costless.

    In 1979 the economist Murray Weidenbaum calculated that pollution controls were costing industry $100 billion per annum. (About $262 billion in today's money). This expenditure was at the expense of investment that would have raised the productivity of labour and hence real wages. Work by Harvard economist Robert Leone revealed that water pollution controls slashed the number of metal finishing factories from 70,000 to 5,000. Further investigations also showed that these regulations had the same effect on tissue-paper manufacturers. The results were predictable: large firms survived while their smaller competitors were bankrupted. Needless to say, these large concerns favoured the regulations1.

    I find it very hard to believe that the pollution from metal finishing factories was so great that 93 per cent of them needed to be bankrupted. Proponents of these regulations could argue that the bankruptcies were simply the result of the "Pigouvian" policy of taxing negative externalities so as to bring private costs into line with social costs. Unfortunately Pigou's tax solution is deeply flawed. His erroneous view of the problem led the British economist Ronald. H. Coase to develop what became known as the Coase theorem, which basically argues that optimum outcomes are achieved if property owners are allowed to negotiate between themselves. (This is a highly stripped down description of the theorem). In other words, the problem here is not market failure but institutional failure.2

    It is generally recognised among economists that the Coase approach is superior to the Pigouvian remedy, though I believe it does contain a serious flaw with respect to its particular use of prices. Now if the Coase approach had been applied to the water-pollution problem would 65,000 metal-finishing factories — not to mention a large number of paper-tissue manufacturers — have been forced to wall? I doubt it.

    A Pigouvian policy results in a bureaucratic strait-jacket, a one-size fits all irrespective of individual circumstances. Moreover, it is open to corruption and political abuse. For instance, what is to stop green fanatics in the Environmental Protection Agency from using it to try and destroy an industry — coal mining, perhaps — that they don't like?

    Pollution controls are not costless. This is not to imply that they are not necessary, only that we need to be made aware of the fact that there are always trade offs. I was raised in the Midlands, sometimes called the industrial heart of Britain, and I still vividly remember the unbelievable density of the smog — which was also a killer — and its frequent recurrences. Thanks to the clean air acts (there was no pollution tax) smog quickly disappeared from the British environment. But This only happened because economic growth had created the wealth and the means to eliminate smog with very little cost to the economy.

    One critic declared that "connecting a cap and trade tax to capital was dishonest". This amounts to saying that a land tax would not affect the price of land, or that changes in demand cannot affect the prices of capital goods. In other words, only a complete economic illiterate could make such a ridiculous assertion. Fortunately there exists a recent example that neatly exemplifies my point. Australia's National Generators Forum estimated that the Rudd Government's carbon tax would impose $10 billion in capital losses on coal-fired power plants. (ETS 'may bankrupt power stations', Lenore Taylor, The Australian, 1 May 2009). So much for the air-headed notion that carbon taxes cannot affect the prices of capital goods and therefore the capital structure.

    In order to deal with the remaining criticism I must once again return to capital theory. For the sake of simplicity I shall use the orthodox approach and assume capital is homogeneous, with the proviso that capital goods are also discrete. This means that we can now measure the actual amount of capital. Let us number the capital stock at 100. Of this amount 10 units are used to provide electricity for the whole economy. We also assume that all the firms have factor combinations that minimise their average costs of production.

    Everything is going swimmingly until a group persuade the government that unless the current method of using centralised generating plants to produce electricity is abandoned in favour of wind and solar power there will be a colossal environmental disaster. The government now mandates that the plants must be phased out and alternative energy used instead.

    But because energy density for solar and wind is pathetically weak and hellishly unreliable these alternatives will require vastly more capital and labour to produce the same amount of electricity as a centralised generating plant3. Now let us say it has been estimated that alternative energy production is three times more expensive then the usual method. Does this mean that the economy would now need 30 units of capital to produce its electricity? Bad as this would be, the actual situation would be far worse.

    As centralised power plants are closed down more and more labour, land and capital has to be directed to the production of the same unit of electricity. In plain English, productivity will dive and prices will "skyrocket", a fact that Obama admitted and which his supporters ignore. The price of electricity rises, not because it costs more (prices determine costs, that's why imputation exists) but because there is less of it. Because electricity prices are rising firms now find that their factor combinations no longer minimise their average costs of production. These combinations will start to disintegrate as firms move to more labour intensive techniques that employ less energy and capital goods will be abandoned4. Productivity falls, forcing down real wage rates and hence living standards. If this process continued uninterrupted the economy would come to rest at a point where living standards and the consumption of electricity have reached an abject level.

    Critics could once again scream that this approach is too simplistic to apply to the US economy. On the contrary. In the real world capital goods are heterogeneous: this is a fancy way of saying that they are not perfect substitutes for each other. In such a world there is a great deal of specificity, meaning that changes in costs and demand can completely destroy the value of specific capital goods. This is one of the reason's Obama's energy policy would be particularly devastating.

    Two further points: I thought it was clear from my last article that the idea that revenue from a carbon tax could offset its destructive effects was ludicrous5. Judging from some of the emails I got I was wrong. However, it should now be abundantly clear why it is impossible for tax cuts to offset the income effects of a carbon tax let alone stabilise energy prices and stimulate the economy.

    This now brings us Co2 and the Orwellian dishonesty of the greens and their media allies. Co2 is not a pollutant: it is a nutrient and the building block of life. Secondly, it is not true that human activity correlates with the amount of Co2. The green argument that human activity correlates with global temperatures is another lie. (The Carbon Sense Coalition).

    A final note: Not a single critic commented on the quotes from leading greens in which they admitted that alternative energy sources are to be promoted because they are expensive. Now why was that, I wonder?

    1. The role that the big meat packers played in regulating their industry during the Teddy Roosevelt administration was detailed by Gabriel Kolko. (The Triumph of Conservatism, Free Press, 1977. pp. 98-108).

    2. With respect to market failure, one obviously exasperated critic wrote, "OK smarty pants, whats your brilliant theory to explain the financial and banking crisis?" What is it with these people? I have written numerous articles on the causes of the trade cycle and the financial crisis and this bloke wants to know what my theory is. It is not my theory, it is the Austrian school theory, the roots of which can be traced back to some of the early classical economists. Seeing as this character is too lazy to do a Google search I'll give him a hand. Try Prime Minister Rudd's misbegotten assault on the market goes unchallenged.

    3. In my last article I emphasised the fact that even if these alternatives were 100 per cent efficient technically they would still be horribly inefficient economically and that there is absolutely nothing that can be done about this situation. This why I said you cannot get a gallon out of a pint pot. Nevertheless, critics still mindlessly asserted that all we need is "greater efficiency". Now imagine that two techniques, A and B, produce p. A requires one unit of labour and nine units of capital while B requires one unit of labour but only 3 units of capital. It is obvious that B is the more efficient technique. However, in the greens' world we would be forced to adopt A. And this is eactly what is happening with respect to energy.

    4. Some could argue that because these capital goods are perfect substitutes they would simply be recombined with labour and land but with a lower level of productivity. My argument is that capital goods are by definition complementary. This means that because of the supply of electricity had been drastically curtailed there would not be enough energy to now employ the entire capital stock.

    5. The Sydney-based Centre for Independent Studies has also been promoting this rubbish.

    Gerard Jackson is Brookesnews' economics editor

    Nov 02 11:22 PM | Link | Comment!
  • The US economy: inflation, deflation, stagflation — which one will it be?

    According to Alan Greenspan the recession is over. What can one say? Greenspan jettisoned his economic bearings years ago and now the "Guru" who failed to predict the current recession is hailing a recovery that is looking more and more like a phantom with each passing day. In the meantime unemployment mounts and the dollar continues to slide. Now this is where it gets interesting. Many commentators are telling us that deflation has arrived while a depreciating dollar is warning of inflation. Which is it? Without a doubt, it's the latter. These people have overlooked the fact that a deflation requires a monetary contraction.

    The problem is that people who should know better are confusing price adjustments with a contractionary policy. If they were right the dollar would be appreciating in anticipation of a rise in domestic purchasing power. What we are seeing is that the markets are distinguishing between the short term and the long term, which is exactly what Bernanke expected. He's a Keynesian but he's not an idiot.

    We are told that the upside to a depreciation will be an increase in the demand for American exports which will stimulate US manufacturing. But a continuing depreciation implies an inflation rate in excess of America's trading partners. This is a calculated destruction of the currency and a policy for impoverishment, not economic growth. A depreciation leads to the rearrangement of capital goods: it cannot increase their quantity. And growth is just another term for the process of capital accumulation. Under these circumstances Americans would have to accept falling living standards. Now I want to stress that this will only happen if the depreciation is relentless and the process of expanding the capital structure ceases.

    Naturally, as the dollar falls foreign purchases of American assets will grow. This is already happening as foreigners pour in money to buy up US shares and property. Despite the fact that this assets sell-off is monetary-induced expect unions to start squealing about free trade leading to the farm being sold and that what is needed to prevent this treason is greater government intervention, something the Obama administration has made clear it is only too willing to provide. What it isn't providing are sound economic policies.

    Obama and his crew not only set their faces against tax cuts they are preparing launch a flood of new taxes in the near future. According to these brilliant economic historians and dazzling economic theorists tax cuts have never worked and never will. Moreover, raising wages rates above the value of the worker's product never causes unemployment. This is why they raised the minimum wage last July. The result, teen unemployment rocketed in August and September. And yet the Obama administration is considering a $3,000 tax credit business for every extra worker a firm takes on.

    Hang on a minute. If excessive wage rate do not cause unemployment then why the tax credit? What's missing here is not only consistency but the failure to recognise that for the credit to work it would have to be permanent, or remain until by one means or another wages rates were aligned with the value of the worker's output. There is the additional problem that at the moment much of the unemployment is of a restructuring nature. The boom created malinvestments which are still being liquidated. This adjustment process makes unemployment unavoidable. As a rule the duration of this type of unemployment is comparatively short. Whether it becomes intractable depends on Obama. Right now the situation is not looking good. He is making it very clear that in his ideology big government is always the solution and never the problem.

    There appears nothing in his character or intellectual make-up that suggests he is capable of a change of mind. The result is that the banks borrow from the Fed at what amounts to a zero rate of interest. They then lend to the government at something like 4 per cent so that it can spend more and more. (The Democrats have put another spending binge on the table). What the banks are not doing is lending to business. Now this is not as straightforward as it appears, even though the lending process is genuinely absurd from an economic angle.

    The self-evident effect of this borrowing is to allow the administration to increase its spending. In doing so it competes with business. As it continues to raise its spending it exerts an ever increasing downward pressure on the country's production structure which in turn will put further pressure on living standards. In doing so it also will squeeze more and more companies, particularly small ones. (If I was a conspiracy-minded person — which I am not — I would be tempted to call this "a revolution from the top" to put the US into a statist straitjacket). In other words, business will find itself competing for a diminishing pool of capital. I doubt if this was the kind of "change" Americans were expecting.

    Assuming that Obama adheres to his present course then there is every possibility that the monetary dam that Bernanke constructed will eventually flood the banking system and generate surging inflation, sending the dollar into free fall and leaving Americans struggling with stagflation.

    As a last resort, the Democrats and their media stooges can always blame Bush — again.

    Gerard Jackson is Brookesnews' economics editor

    Oct 12 2:30 AM | Link | Comment!
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