As author of a blog dedicated to highlighting Keynesian nonsense, the title of Caroline Baum's December 16, 2015 article on Economics21.org, Pent-Up Nonsense and Other Loopy Ideas from 2015, piqued my curiosity. Caroline is a veteran economics journalist who does an excellent job challenging conventional wisdom.
In point #1, Pent-up Nonsense, Baum criticizes the use of "pent-up" demand as a reason to explain weakness or strength in consumer spending. As humans, our wants are unlimited; they are never satiated. However, consuming is not the problem. Acquiring the means to consume is. We must produce first in order to consume. Since our production is our demand, politicians should remove as many barriers to production as possible to maximize output. Barriers include high taxes on income and capital, trade restrictions, onerous regulations, and unstable money.
In point #2, Lower Oil Prices Are Not Like a Tax Cut, Baum asks a great question, why are lower oil prices assumed to be the equivalent of a tax cut? While consumers may have more money in their pockets due to lower gasoline prices, those businesses and individuals tied to the oil and gas industry have that much less to spend and invest. Total spending is unchanged, only its composition has shifted. The "windfall" is an illusion.
I quibble somewhat with point #4, The Uncertainty Principle. Baum is skeptical of citing economic policy uncertainty as a reason why businesses are reluctant to invest. Yes, of course the future is uncertain. But I don't believe federal laws, such as Sarbanes-Oxley, Dodd-Frank, and Obamacare, which run thousands of pages long with rules that will be written in the future by unelected bureaucrats, make for an environment conductive for business investment and expansion.
In Happy New Regulatory Year, the Wall Street Journal editorial board states that over 82,000 pages of new and proposed rules were added to the Federal Register in 2015. The editorial also notes the Obama Administration has generated six of the seven most prolific years of regulating in the history of the country. Instead of focusing resources and effort on creating value, businesses must instead divert more of the same to activities that are required to keep the bureaucrats at bay.
Federal Reserve monetary policy is another potent source of uncertainty. David Ranson demonstrates in The Fed is Holding Rates Down for All the Wrong Reasons, a consistent inverse relationship between month-to-month volatility in the federal funds rate (the rate the Fed targets via open-market operations) and the subsequent year's real GDP growth.
During 2015, how much time and effort was wasted on "Fed-watching" and guessing when the Fed would indeed move to increase the federal funds rate? Is this a productive activity for investors and businesses? Clearly not, but something that must be done when the Fed's activities have such impact on the capital markets and the economy.
Her final point, #5, Two Lumps Are Better Than One, takes issue with the notion that the amount of work in an economy is fixed, such that new immigrants and productivity improvements (e.g. robots replacing humans or using ATMs rather than bank tellers) steal jobs. Not true. Jobs (and the wages they generate) are the result of investment. Wherever there is investment, you will find jobs (e.g. Silicon Valley and until recently in shale oil basins in Texas). Many people believe poor immigrants drive down wages but this is false. John Tamny explains this in Immigration Grandstanding by Ted Cruz Vandalizes Basic Economics. He cites low-wage Detroit to refute this point.
