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Stop obsessing about Japan and deflation

By Thomas E. Brewton
web posted November 22, 2010

Fed chairman Ben Bernanke apparently is misled by fictionalized versions of two economic models: Franklin Roosevelt's New Deal Keynesianism and Japan's deflation and economic stagnation.

Mr. Bernanke reads New Deal economic history with blinders firmly affixed to narrow the breadth of his vision.  In the face of overwhelming evidence to the contrary, he holds to his philosophically materialistic, Keynesian economics faith that manipulation of monetary quantity alone is a mathematically certain, unfailing cure for any economic downturn or increase in unemployment. 

Keynesian macroeconomics depends upon a simplistic faith that mathematical inerrancy can be applied to human conduct, that the behavior of hundreds of millions of people can be conformed to an academic spreadsheet model of an economy.  Keynesian logic says that, if A = B, then reversing the equation, starting with B, will produce A.  Implicitly for Keynesians, if A (expanding business activity) equals (produces) more bank credit and more money in circulation, then flipping the equation and starting with B (increasing the money supply) will create more bank lending and increase business activity. 

What happens instead is blips in business activity, rendered temporary by uncertainty about the effects of government action and fear of worse to come, accompanied by misallocation of investment funds and long-range inflation that robs everyone of the value of work and saving.

Neglected is the reality that businesses will not markedly rev up production and resume large-scale hiring so long as they confront huge increases in operating costs, the full extent of which is unknown until millions of new regulations have been written.  Nor will they do so when the president continually tongue lashes them as greedy capitalist criminals, and the Democrat/Socialist Party threatens yet more punitive programs such as cap-and-trade regulations and regulating CO2, a by-product of almost every human activity, as a toxic agent.

Mr. Bernanke's Keynesian economics became fashionable in the 1930s among Franklin Roosevelt's Ivy League policy advisors for one primary reason: it fit with the prevailing faith that economic prosperity and social justice (read cradle-to-grave welfare benefits) could be attained under socialism.

Private enterprise, in their view, had spectacularly failed, evidenced by the 1929 stock market crash.  According to socialist economists such as Harvard's Alvin Hansen, private business would never regain the production levels of 1928.  Businessmen were just too stupid to understand the refined aspects of academic economic theory.  Government would have to expand and become the employer and investor to fill the gap and eliminate unemployment.  That meant punishing private business directly and indirectly through regulation.  Most of all it meant huge increases in Federal spending, along with much higher taxes to take presumably ill-got money from "the rich" and re-distribute it to the deserving workers.

Such remains the social-justice economic paradigm of Obama's Democrat/Socialist Party administration and of its handmaiden, Ben Bernanke's Federal Reserve.

Mr. Bernanke's other obsession is that the United States may fall into the grip of deflation, another name for Keynes's notorious "liquidity trap."  Keynesian true-believers like Paul Krugman proclaim that we already are there.  Businessmen and consumers, just too befuddled and stupid to comprehend the reality understood only by academics, should be spending at a rapid pace to reduce unemployment and prolong the housing boom.  Instead businesses are sitting on billions of dollars of cash, and consumers, fearing loss of jobs and economic unknowns, are reducing spending and paying down their debts.

Faced with this Marxian lumpen proletariat, the duty and prerogative of liberal-progressive-socialists is take command of the economy.  Unheeding and resistive consumers and businessmen must be prodded by Marxian, Darwinian materialistic forces, such as government deficit stimulus spending and oceans of phony money inundating Wall Street.  Liberal-progressive-socialists must compel them to stop saving, start spending, and place their faith in the social justice to come under a fully socialized economic and political state.

Whence Mr. Bernanke's new $600 billion program of quantitative monetary easing to prevent deflation.  Meanwhile, in the real world, as economics columnist Larry Kudlow reports, "Since Bernanke first hinted at quantitative easing in late August, commodity indexes have jumped nearly 20 percent, gold has hit a new record high over $1,400 an ounce and the dollar has fallen nearly 10 percent against the euro." 

Some years ago, Mr. Bernanke's academic studies persuaded him that Japanese authorities could have forestalled that nation's decade of deflation and domestic economic stagnation, had they leapt into full-fledged Keynesianism.  He publicly scolded Japanese authorities for being too slow to apply a full-court-press Keynesian package of massive expansion of the money supply, intended to drive interest rates to near zero. 

Had they heeded Mr. Bernanke, presumably consumers would have been led to increase spending, business would have stepped up production, and Japan would have remained a strong and growing No. 2 world economy.

The Japanese paradigm, however, is not a good match for economic conditions in the United States.  Carnegie-Mellon professor Tom Emerson alerted me to Robert J. Samuelson's "How to avoid Japan's economic mistakes", published in the November 15, 2010, edition of the Washington Post.

In it, Mr. Samuelson notes that deflation in Japan is much more than a money supply, interest rate phenomenon.  As Austrian economists observe, human instincts, shaped by local conditions and age-old traditions, are the real factors determining economic well being.  Human nature on the whole has remained the same since the advent of homo sapiens.  But liberal-progressive-socialist academics will never be able to foresee and control the specific reactions of hundreds of millions of individuals. ESR

Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. The New Media Alliance is a non-profit (501c3) national coalition of writers, journalists and grass-roots media outlets. His weblog is The View from 1776. Email comments to viewfrom1776@thomasbrewton.com.





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