If you want an illustration of the utter intellectual bankruptcy of our Keynesian policy overlords just review the attached Wall Street Journal piece on yet another downgrade by the EC of its official economic growth forecast. What’s illuminating is not that the savants of Brussels were wrong by a country-mile yet again, but that they persist in a mechanistic numbers game that resembles nothing so much as ritual incantation.
Yep, the Keynesian priesthood is operating from sacred texts and magic numbers. One of these revelations says that 2% inflation was decreed by the great god of GDP and that any shortfall will precipitate his wrathful extractions from growth and jobs. But there is not a shed of empirical evidence for 2% versus 1% or 3% annual change in consumer inflation – – even if it were honestly measured. Its just revealed word as transmitted by the Keynesian priesthood.
Another sacred tenent avers that in handing down the laws of proper economic life, the Keynesian creator ordained that governments everywhere and always must strive to bring GDP growth to its full employment ‘potential’ rate. No exceptions. World without end.
While the texts are not clear on the precise numeric value of this divinely ordained rate of potential GDP growth, today’s congregants claim that it’s about 3%, reflecting the historic trend growth of the labor supply plus productivity gains. In fact, however, we have achieved only about half of that – about 1.8% per annum – -in the US during the last 14 years, and even a lesser fraction in Europe.
Accordingly, this imaginary trend line of ‘potential GDP’ is now far above actual output levels. This yawning gap between the real economy and its revealed potential, in turn, enables the Keynesian priesthood to demand an endless crusade by the fiscal and central banking agencies of the state to close it.
This essentially means that the state’s economic apparatus is now all about stimulus, all of the time. In fact, the state’s central banking branch has gotten so deep into ritualized Keynesian governance that it’s essentially attempting to micro-manage vast accumulations of GDP – -about $17 trillion each in the US and Europe – -on a monthly basis. That’s entirely what the meeting statements and post-meeting press conferences are all about.
Yet this is absurd. The information flow in a $17 trillion economy is far too vast to be digested and assessed by the 12 mortal members of the FOMC, and their policy control instrument – -the bludgeon of interest rate manipulations – – could not possibly shape its short-run course in any event. That’s especially true since the macro-economy is not a closed system, but one open to every manner of complicating and countervailing influence from trade, capital flows and financial impulses in a $80 trillion global economy.
This post was published at David Stockmans Contra Corner on November 5, 2014.
Recently the financial press and media has been abuzz as the Federal Reserve moved closer to the anticipated end to its massive bond and mortgage backed securities purchases known as quantitative easing. James Bullard, President of the St. Louis Federal Reserve Bank, stirred controversy last week when he suggested the Fed should consider continuing the bond buying program after October. But at the October 29th meeting, the policy makers did as anticipated and ‘agreed to end its asset purchase program.’ However one voting member agreed with Mr. Bullard. Per the official press release, ‘Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level’ (emphasis added).
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