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Monday, June 11, 2012 3:15 AM


Modern Day Fairy Tale of 3 Economic Wizards (Except It's True)


Once upon a time (today), in a land not so far away (USA), there lived a trio of economic wizards (economists), whose names shall remain anonymous (Paul Krugman, Greg Mankiw, Ben Bernanke).

A fourth wizard, Murry Rothbard, is no longer among the living but resides in the netherworld.

The above wizards seldom agree with each other because they come from competing schools of wizardry.

Three Schools of Economic Wizardry

  1. Keynesian School of Fiscal Voodoo and Witchcraft
  2. Monetarist School of Monetary Voodoo and Witchcraft
  3. Austrian School of Sound Money, Sound Economic Principles and Common Sense.

"Dark Arts" Wizardry

The first two wizardry schools belong to a class of wizardry promoted to aspiring wizards as the "Dark Arts".

Philosophical Beliefs

  • Keynesian wizards believe governments can spend their way to economic health and although fiscal deficits may matter at some point in time, they never matter now, in practice.
  • Monetarist wizards believe money will cure any and every problem if enough is dropped from helicopters and interest rates held low.
  • Austrian wizards believe that economic problems are created by unsound money, haphazard loans, excessive debts, and government manipulations.
  • Keynesian and Monetarist wizards believe in the voodoo principle "the problem is the solution if only you do more of it". The former relies primarily on fiscal voodoo, the latter relies primarily on monetary voodoo.
  • Austrian wizards do not believe "the problem is the solution", no matter how many times it is repeated.


Grand Poobahs

  1. Paul Krugman is the economic "Grand Poobah" of the Keynesian wizards.
  2. The "Grand Poobah" of Monetarist Voodoo is Fed chairman Ben Bernanke.
  3. Murray Rothbard, no longer alive, was the last great proponent of  school of Sound Money, Sound Economic Principles, and Common Sense.

"Dark Arts" Schools Overflowing With Students

The "Dark Arts" are very enticing to modern day wizards-in-training because nearly everyone likes money from helicopters and deficit spending (even when they claim they don't).

In response to demand for voodoo economists, the "Dark Arts" schools for voodoo economics are overflowing with young wizards all hoping to win a Nobel Prize in Voodooism with "fresh thinking" and new voodoo proposals.

Voodoo Proposal Example - Purposely Make Money Go Worthless

Aspiring Grand Poobah Greg Mankiw (Professor of Economic Wizardry at Harvard University) put forth a proposal that caused a stir in both the real world and the world of wizards.

Mankiw proposed that purposely making money go worthless over time would be of great economic benefit.

No Demand for Common Sense

The average non-wizard, living in the real world, with an education level beyond 2nd grade, would quickly see the ridiculousness of making money go worthless.

However, at the highest political levels, there is virtually no demand for common sense, and shockingly high demand for voodoo wizardry.

For example, if you ever expect to make chairman of the president's Council of Economic Advisers or become an economic adviser to Mitt Romney (Wizard Mankiw did both), then common sense must go out the window.

Aspiring wizards hoping for careers in politics better quickly learn that politicians never want to hear they cannot spend money. Instead, politicians want to hear economic voodoo.

"Dark Arts" Feuds

Given Keynesian and Monetarist wizards both believe in voodoo, one might think the two schools would get along reasonably well. One would be wrong.

There have been numerous public squabbles between Mankiw and Krugman but the mother of all verbal wizardry battles came when Krugman went so deep into fiscal voodoo theory that Bernanke Called Krugman "Reckless"

Ivory Towers and Academic Wonderland

Unlike non-wizards, modern-day economic wizards do not live in the real world, in real cities. Instead, they live in ivory towers in secret villages for wizards only, typically tucked away in obscure corners of major U.S. universities.

Collectively, these secret villages are known as "Academic Wonderland".

"Academic Wonderland" is strictly off limits to non-wizards with the exception of "Dark Arts" wizards-in-training. It is even off limits to those few aspiring wizards who believe in Sound Money, Sound Economic Principles, and Common Sense.

Real World Experience

"Dark Arts" wizards of the Keynesian and Monetarist schools generally have never worked in the real world. Instead, they sit in their ivory towers and devise empirical formulas as to how they expect the real world to behave.

Occasionally the "Dark Arts" wizards surface in the real world, primarily to explain their mathematical formulas as to how the world functions.

It is seldom of concern to economic wizards if the real world does not follow their mathematical formulas.

Decision Making at Night

"Dark Arts" wizards are very concerned about such nebulous concepts as the "Decision Making at Night". Here is set of equations from an aspiring wizard-in-training.



"Decision making at night" is of course different from "decision making in the day". Both are distinctly different than "decision making with no news".

Voodoo Wizards Like Secrecy

The voodoo wizard-in-training making the above proposal is a big proponent of secrecy, believing that Grand Poobahs need to keep what they are doing a big secret lest it change real-world decision making processes of non-wizards during the day or night.

Austerity

No "Dark Arts" wizard worth his weight in salt would ever propose that any country live within its means.

For a recent example, Paul Krugman, the Grand Poobah of the Keynesian School of Fiscal Voodoo and Witchcraft writes about Estonian Rhapsody.
Since Estonia has suddenly become the poster child for austerity defenders — they’re on the euro and they’re booming! — I thought it might be useful to have a picture of what we’re talking about. Here’s real GDP, from Eurostat:



So, a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?
Left Unsaid

Here's what Grand Poobah Krugman failed to say about the Booming Estonia Economy.
Sixteen months after it joined the struggling currency bloc, Estonia is booming. The economy grew 7.6 percent last year, five times the euro-zone average.

Estonia is the only euro-zone country with a budget surplus. National debt is just 6 percent of GDP, compared to 81 percent in virtuous Germany, or 165 percent in Greece.

Shoppers throng Nordic design shops and cool new restaurants in Tallinn, the medieval capital, and cutting-edge tech firms complain they can’t find people to fill their job vacancies.

Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. In 2008-2009, its economy shrank by 18 percent. That’s a bigger contraction than Greece has suffered over the past five years.

How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank.
Estonia vs. Fantasyland

Estonia is not Nirvana. Estonia is not "Academic Wonderland" either.

In contrast, Krugman is in "Academic Wonderland". The Grand Poobah clearly believes Estonia would be in better shape with helicopter drops of fiscal stimulus than a very nice partial recovery and no debt, in spite of the fact the eurozone in general is going to hell in a hand basket.

Debt Never a Problem

In modern-day ivory towers, with voodoo economics, debt is never a problem. The only thing that matters is GDP.

One might think that a Nobel prize winner would figure out that government spending will make GDP rise by definition (government spending is part of the equation) and the debt must be paid back. However, one would be wrong.

Bear in mind, Japan has tried both Keynesian voodoo and Monetarist voodoo for over 20 years. The result is a nearly unfathomable debt-to-GDP ratio of 220% and rising. Krugman would have you believe still more spending is the answer. Monetarists like Mankiw would propose making the Yen worthless.

Remember the Voodoo Motto!

Please remember the voodoo motto: If it doesn't work, keep doing more of it, even if that is what got you in trouble in the first place!

Anyone with an ounce of common sense would realize that artificial stimulus will always end, but the debt will remain, hanging like the Sword of Damocles over the economy.

Sadly, these modern-day economic wizards do not have the common sense of the average 6th grader who inherently knows that you cannot keep spending what you do not have.

Invalid Comparisons

No doubt Krugman will point to the misery in Spain and Greece. The comparison is invalid. Estonia is booming not solely because of austerity but rather because it did a number of common-sense things that Spain and Greece did not fully do.

  1. Slashed public sector wages
  2. Raised the pension age
  3. Reduced job protection
  4. Made it more difficult to claim health benefits

Keynesian wizards would be against all those things!

Was Krugman a Housing Bubble Proponent?

In a 2002 New York Times editorial Krugman said "To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Krugman claims "that wasn't a piece of policy advocacy, it was just economic analysis."

For further discussion please see Krugman's Intellectual Waterloo

When wizards get into trouble they claim they were misquoted, someone did too much, someone did not do enough or any number of other excuses.

No, it was not "policy advocacy", it was simply economic voodoo that Krugman condoned.

Krugman a Panderer to Public Unions

One of the reasons Estonia is recovering is it had the common sense to slash public sector wages.

In contrast, Krugman is a strong backer of public unions as noted in Wisconsin Power Play.

The reasons Krugman supports unions should be obvious:

  1. Krugman wants to waste as much money as possible (because that is what Keynesian voodoo economics is all about).
  2. There is no better way to waste taxpayer money than overpay for services from public unions.
Wizards in ivory towers have not completely figured out that money to pay public unions has to come from somewhere (namely taxpayers in general). Of course liberal Keynesian wizards (the worst kind) have an answer for that as well: take from productive members of society and slosh it around to public unions.

Never mind that public unions have bankrupted numerous cities and even in economic la-la land (otherwise known as California), backlash against unions is justifiably high and rising.

Moral of the Story

The average non-wizard non-union employee has long ago figured out the moral of this story. Those in ivory towers in "Academic Wonderland" have not, so I need to spell it out.

It is indeed possible to have a genuine economic debt-free recovery, along with austerity, as long as other sound economic measures are incorporated at the same time.

Yes, there will be some short-term pain. However, any attempt to avoid pain via heaps of fiscal and monetary stimulus is nothing but voodoo economics and can-kicking witchcraft.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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